ORegon Equipment Company wants to develop a new log-splitting machine for rural

Question

ORegon Equipment Company wants to develop a new log-splitting machine for rural homeowners. Market research has determined that the company could sell 5,000 log-splitting machines per year at a retail price of $600 each. An independent catalog company would handle sales for an annual fee of $2,000 plus $50 per unit sold. The cost of the raw materials required to produce the log splitting machines amounts to $80 per unit.

a. If company management desires a return equal to 10 percent of the final selling price, what is the target unit cost?

Explanation / Answer

Variable Cost spent = 50 + 80 = 130/unit fixed cost = 5000/2000 = 2.5/unit each must give a min profit of 10% ==> selling price = .1(132.5+p) = p ==> p = 14.67 ==> selling price = 147.17

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