Question

himada Products Corporation of Japan is anxious to enter the electronic calculator market. Management believes that in order to be competitive in world markets, the price of the electronic calculator that the company is developing cannot exceed $15. Shimada’s required rate of return is 12% on all investments. An investment of $5,000,000 would be required to purchase the equipment needed to produce the 300,000 calculators that management believes can be sold each year at the $15 price. Required: Compute the target cost of one calculator.

Answer 1

Sales (300,000 units × $15 per unit) $4,500,000

Less desired profit (12% × $5,000,000) 600,000

Target cost for 300,000 units $3,900,000

Target cost of 1 unit(3,900,000 / 300,000) 13