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 $700 each. An independent catalog company would handle sales for an annual fee of $3,000 plus $40 per unit sold. The cost of the raw materials required to produce the log-splitting machines amounts to $90 per unit. If company management desires a return equal to 10 percent of the final selling price, what is the target conversion and administrative cost per unit? Round answer to the nearest cent. $Answer

Explanation / Answer

Statement showing computations Particulars Amount Log Splitting Machines = 5,000*700                          3,500,000.00 Annual Fee Variable = 5,000*40                              200,000.00 Fixed                                  3,000.00 Cost of direct materials = 5,000*90                              450,000.00 Total Costs excluding Conversion and admin cost                              653,000.00 Desired return = 3,500,000*10%                              350,000.00 Total Costs excluding Conversion and admin cost and desired return                          1,003,000.00 target conversion and administrative cost                          2,497,000.00 target conversion and administrative cost per unit =2497,000/5000                                      499.40

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