Question

Eastern Auto Supply, Inc., produces and distributes auto supplies. The company is anxious to enter the rapidly growing market for long-life batteries that is based on lithium technology. Management believes that to be fully competitive, the price of the new battery that the company is developing cannot exceed $65. At this price, management is confident that the company can sell 50,000 batteries per year. The batteries would require an investment of $2,500,000, and the desired ROI is 20%.   

Required: Compute the target cost of one battery.

Answer 1

• All working forms part of the answer
• Working

A	Investments	$          2,500,000
B = A x 20%	Return on Investment desired	$              500,000
C = 50000 units x $ 65	Sales Revenue on 50000 units at maximum sales price	$          3,250,000
D = C - B	Total target Cost	$          2,750,000
E	Total units of battery	50,000
F = D/E	Target Cost of one battery	$                         55 = ANSWER

• Answer = $ 55 per battery = target cost