Packer Stoves Inc. is designing a commercial style stove for residential use. Th
ID: 2541036 • Letter: P
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.
Explanation / Answer
Answer
‘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]
Selling price
$4700
(-) Profit [4700 x 25/125]
$940
Target cost per stove
$3760
Target cost =
2900 + 1800000/x
3760 =
2900 + 1800000/x
3760 - 2900 =
1800000/x
860x =
1800000
x =
1800000/860
x =
2093 units approx
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
Variable Cost per unit
$2900
Fixed Cost
1800000/x
Total cost
2900 + 1800000/x
Profit 25%
725 + 450000/x
Price
$ [3625 + 2250000/x]
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