Question

Colton's Paints makes and sells paint to home improvement stores. Colton​'s only plant can produce up to15 million cans of paint per year. Current annual production is 12 million cans. Fixed​ manufacturing, selling, and administrative costs total $10.8 million per year. The variable cost of making and selling each can of paint is $6.20. Stockholders expect a 15​% annual return on the​ company's $34 million of assets.

Requirement 2. Assume that Colton is a​ price-taker and the current wholesale market price is $7.70 per can of paint. What is the target total of cost in producing and selling 12 million cans of​ paint? Given Colton​'s current total​ costs, will the company reach​ stockholders' profit​ goals?

Begin by calculating Colton​'s target total cost. Select the formula labels and enter the amounts. ​(Enter currency amounts in​ dollars, not in millions. Round all currency amounts to the nearest whole​ dollar.)

Revenue at market price		$92,400,000
Less:	Desired profit	5,100,000
Target total cost		$87,300,000

Given Colton​'s current total​ costs, will the company reach​ stockholders' profit​ goals? ​(Enter currency amounts in​ dollars, not in​ millions.)

Yes

, the company

will

reach stockholders' profit goals. There will be a(an)

? ????

excess

.

I need help finding the amount of excess.

Answer 1

Solution

Colton’s Paints

Determination of target total cost in producing and selling 12 million cans of paint:

Variable cost at $6.20 per can            $74,400,000

Fixed costs                                          $10,800,000

Total costs                                          $85,200,000

Given the total costs, will the company reach the stockholders’ profit goals –

Expected revenue at $7.70 per can     $92,400,000

Less: total costs                                  $85,200,000

Profit                                                   $7,200,000

Stockholders’ profit goals = 15% x $34 million = $5,100,000

Excess of profit over stockholders’ profit goals = 7,200,000 – 5,100,000 = $2,100,000

Yes, the company will reach stockholders’ profit goals.

Alternatively,

Revenue at market price         $92,400,000

Less: desired profits               $5,100,000

Target total cost                      $87,300,000

Current total cost                    $85,200,000

Excess amount                        $2,100,000