09 May WHAT IS THE TARGET COST PER UNIT FOR THE NEW PRICE IF TARGET OPERATING INCOME IS 20% OF SALES?
Florida’s Medical Equipment Company manufactures hospital beds. Its most popular model Relax sells for $5 000. It has variable costs totaling $2 800 and fixed costs of $1 000 per unit based on an average production run of 5 000 units. It normally has four production runs a year with $400 000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30 000 beds.A competitor is introducing a new hospital bed similar to Relax that will sell for $4 000. Management believes it must lower the price to compete. Marketing believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Relax beds it can produce.Required:a) What is the annual operating income from Relax at the current price of $5 000?b) What is the annual operating income from Relax if the price is reduced to $4 000 and sales in units increase by 25%?c) What is the target cost per unit for the new price if target operating income is 20% of sales?
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