Question

Concord Water is considering introducing a water filtration device for its 20-ounce water bottles. Market research indicates that 1,000,000 units can be sold if the price is no more than $3. If Concord Water decides to produce the filters, it will need to invest $2,000,000 in new production equipment. Concord Water requires a minimum rate of return of 18% on all investments. Determine the target cost per unit for the filter.

Answer 1

Target cost per unit= $2.64

Step-by-step explanation:

The target cost is arrived at by subtracting the a desired profit margin from a competitive selling price.

The target cost per unit =

((selling price × qty) - (cost of capital(%) × initial cost))/No of units

=( (3× 1,000,000) - (18%×2,000,000) )/ 1,000,000

= 2.64

Target cost per unit= $2.64