Question

Ignite Products is a

price−taker.

The company produces large spools of electrical wire in a highly competitive​ market; thus, it uses target pricing. The current market price of the electric wire is

$700

per unit. The company has

$3,100,000

in average​ assets, and the desired profit is a return of

9​%

on assets. Assume all products produced are sold. The company provides the following​ information:

Sales volume	110,000	units per year
Variable costs	$660	per unit
Fixed costs	$12,000,000	per year

If fixed costs cannot be​ reduced, how much reduction in variable costs will be needed to achieve the desired​ target?

A.

$12,000,000

B.

$7,879,000

C.

$279,000

D. 72,600,000

2)

​Psari's, a company that sells fishing​ nets, provides the following information about its​ product:

Targeted operating income	$60,000
Sales price per unit	6.00
Variable cost per unit	1.50
Total fixed costs	105,000

What is the contribution margin​ ratio? (Round any intermediate calculations and your final answer to two decimal​ places.)

A.

100​%

B.

25​%

C.

75​%

D.

125​%

Answer 1

1) The correct answer is (B) $7,879,000

Explanation:

It is given that,

Selling price of electric wires = $700 per unit
Sales volume = 110,000 units
Total sales = 110,000 × $700 = $77,000,000
Variable cost = $660 per unit
Actual variable cost = 110,000 × $660 = $72,600,000
Fixed cost = $12,000,000
Desired profit = 9% on assets = $3,1 00,000 × 9% = $279,000

Using Cost- Volume- Profit equations we can find out the variable cost to earn the desired profit.

Contribution to get desired profit = Fixed cost + Desired Profit
= $12,000,000 + $279,000 = $12,279,000

Contribution = Sales - Variable cost

Therefore, Variable cost = Sales - Contribution
= $77,000,000 - $12,279,000 = $64,721,000

Actual variable cost = $72,600,000
Variable cost to get desired profit = $64,721,000

Variable cost to be reduced = $72,600,000 - $64,721,000 = $7,879,000

2) The correct answer is (C) 75%.

Explanation:

It is given that,

Targeted operating income = $60,000
Sales price per unit= $6.00
Variable cost per unit = $1.50
Total fixed costs = $105,000

Contribution margin ratio = Selling price - Variable cost / Selling price
= (6.00 - 1.50)/ 6
= 4.5/6 = 0.75 = 75%