Baker PlumbingFixtures is developing a preblumbed acrylic shower unit. The team

Question

Baker PlumbingFixtures is developing a preblumbed acrylic shower unit. The team dveloping the product includes representatives from marketing,
the engineering, snd cost accounting. To date, the teame has developed a set of features that it plans on incorporating in the unit, including a seat,
two shower heads, four body sprays,a nd a steam unit. With the set of features, the team believes that the price of $5,000 will be attractive in the
marketplace. Baker seeks to earn a per unit profit of 30 percent of selling price.

REQUIRED:
a. Calculate target cost per unit.

b. The team has estimated that the fixed production costs associated with the products will be $2,000,000 and variable cost to produce and sell the item
will be $2,500 per per unit. In light of this, how many units must be prduduced and sold to meet the target cost per unit?

c. Suppose the company decides that only 1,400 units can be sold at a price of $5,000 and therefore , the target cost canoot be reached. The company
is considering dropping the steam feature, which adds $600 of variable cost per unit. With this feature dropped, the company believes it can
sell 2,500 units at $4,000 per unit. Will Baker be able to produce the item at the new target cost or less.

Explanation / Answer

a) Target cost is 5,000*(1-.3)= $3,500. b) 3,500= 2,500+ 2,000,000/2,000= 2,500+1,000 so 2,000 units must be sold to meet target cost. c) New variable cost will be 2,500- 600= 1,900. So new cost would be 1,900+2,000,000/1,400= 1,900+1429 (rounded to nearest $)= 3,329 and target cost can be reached.

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