Outdoor Eats is developing a professional grade outdoor cooking stove for the ho
ID: 2532665 • Letter: O
Question
Outdoor Eats is developing a professional grade outdoor cooking stove for the home consumer market. They believe they can sell this stove for $4,500. It is a state of the art, professional grade cooking machine. The company desires a profit of 40% of the selling price. a. What is the target cost per unit? b. The accountants estimate fixed production costs for this stove will be $2,000,000 and variable costs will be $1,800 per unit. How many units must be produced and sold to meet the target cost per unit? c. The company determines they can only sell 1,800 units at the price point determined in b above. They are considering dropping a feature that has a variable cost of $450 per unit. Dropping this feature would also reduce the fixed costs to $1,800,000. With this redesign the company will lower the price to $4,000. What is the new target cost with the redesign? d. With the redesign in item c will the company be profitable if they expect sales to be 2,000 units at this price point? Outdoor Eats is developing a professional grade outdoor cooking stove for the home consumer market. They believe they can sell this stove for $4,500. It is a state of the art, professional grade cooking machine. The company desires a profit of 40% of the selling price. a. What is the target cost per unit? b. The accountants estimate fixed production costs for this stove will be $2,000,000 and variable costs will be $1,800 per unit. How many units must be produced and sold to meet the target cost per unit? c. The company determines they can only sell 1,800 units at the price point determined in b above. They are considering dropping a feature that has a variable cost of $450 per unit. Dropping this feature would also reduce the fixed costs to $1,800,000. With this redesign the company will lower the price to $4,000. What is the new target cost with the redesign? d. With the redesign in item c will the company be profitable if they expect sales to be 2,000 units at this price point?Explanation / Answer
a). Selling Price = $4,500
Desired Profit = 40% of S.P ie- 4,500 x 40% = 1,800, C.P = 4,500 - 1,800 = $2,700
or C.P = S.P x 60% = 4,500 x 60% = $2,700 (Target Price)
b) Variable Cost = 1800, Fixed Cost = 2,700 - 1,800 = $900 per Unit
No. of units to be produced to meet targetcost per unit = 2,000,000 / 900 = 2222.22 Units
c) New Variable Cost = 1,800 - 450 = 1,350 per unit, ie- Total Variable Cost = 1350 x 1800 = 2,430,000
Fixed Cost = 1,800,000
Total Cost = 2,430,000 + 1,800,000 = 4,230,000
New Target Cost = 4,230,000 / 1800 = $2,350 per Unit
d) With S.P = $4,000 (given in c.) Total S.P = 4,000 x 2,000 = $8,000,000
And C.P = $2,350 (Target Price) Total C.P = 4,000 x 2350 = $4,700,000
Profit = $8,000,000? - $4,700,000? = $3,300,000
Yes, the company will bear a profitable outcome of $3,300,000
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