Question

Packer Stoves Inc. is designing a commercial style stove for residential use. The team developing the specifications, cost and pricing decisions includes production, accounting, engineering and marketing. The stove includes a warming drawer, broiler unit, and high BTU burner. With these special features Packer Stoves Inc. believes it can sell the stoves for $4,700. Packer Stoves Inc. desires to earn a 25% profit on each stove. Variable costs are $2,900 per stove and fixed costs are $1,800,000. 1 Using cost+ pricing calculate the price, given the cost and profit information. 2 Calculate the Target cost per stove. How many stoves must Packer Inc. sell to meet the target cost? 3 If Packer decides only 2000 stoves can be sold at $4,700 and, therefore, decides to eliminate the broiler unit thereby saving $650 per stove. With this feature dropped it is estimated that 2,600 units can be sold for $4,000. Will Packer be able to produce the stove at the new target cost.

Answer 1

• All working form part of the answer
• Calculation of Selling price per unit

‘x’ is the no of units sold

Variable Cost per unit	$2900
Fixed Cost	1800000/x
Total cost	2900 + 1800000/x
Profit 25%	725 + 450000/x
Price	$ [3625 + 2250000/x]

• Calculation of Target Cost

Selling price	$4700
(-) Profit [4700 x 25/125]	$940
Target cost per stove	$3760

• How many stove to sell to get target cost of $3760 per unit

Target cost =	2900 + 1800000/x
3760 =	2900 + 1800000/x
3760 - 2900 =	1800000/x
860x =	1800000
x =	1800000/860
x =	2093 units approx

• If 2600 units sold, and variable cost decreased

New Variable Cost per unit	[2900 – 650] $2250
Total variable cost [2250 x 2600	$5850000
Total fixed cost	$1800000
Total cost	$7650000
Units sold	2600
Cost per unit	$2942

Hence, Yes, the new cost per stove is below target cost of $3760