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Waterbury Inc., manufactures and sells RF17, a specialty raft used for whitewater rafting. In 2021, due to increased competition, Waterbury must reduce its selling price to $315 in order to sell 20,000 units. Total fixed costs is $1,680,000. The company expects to be able to reduce the investment in the division to $2,100,000 but still requires a 20% rate of return on investment. If fixed costs cannot be reduced in this time frame, what is the target variable cost per unit? Remember: enter whole integer numbers without Ks, commas, decimals, $, etc.
ANSWER:
Calculate the required return on investment (ROI): [ \text{Required ROI} = \text{Investment} \times \text{Rate of Return} ] [ \text{Required ROI} = $2,100,000 \times 0.20 = $420,000 ]
Determine the total revenue needed to achieve the required ROI: [ \text{Total Revenue} = \text{Total Fixed Costs} + \text{Required ROI} ] [ \text{Total Revenue} = $1,680,000 + $420,000 = $2,100,000 ]
Calculate the total revenue from selling 20,000 units at the reduced price: [ \text{Total Revenue from Sales} = \text{Selling Price per Unit} \times \text{Number of Units} ] [ \text{Total Revenue from Sales} = $315 \times 20,000 = $6,300,000 ]
Determine the total variable costs: [ \text{Total Variable Costs} = \text{Total Revenue from Sales} - \text{Total Revenue} ] [ \text{Total Variable Costs} = $6,300,000 - $2,100,000 = $4,200,000 ]
Calculate the target variable cost per unit: [ \text{Target Variable Cost per Unit} = \frac{\text{Total Variable Costs}}{\text{Number of Units}} ] [ \text{Target Variable Cost per Unit} = \frac{$4,200,000}{20,000} = $210 ]
So, the target variable cost per unit is 210