Question

Eckert Company is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLaser, appears to have a very large potential market. Because of competition, Eckert does not believe that it can charge more than $88 for LittleLaser. At this price, Eckert believes it can sell 117,000 of these laser guns. Eckert will require an investment of $11,700,000 to manufacture, and the company wants an ROI of 15%. Determine the target cost for one LittleLaser.

Answer 1

Investment = $11,700,000

Return on investment = 15%

Net income = Investment x Return on investment

= 11,700,000 x 15%

= $1,755,000

Number of units sold = 117,000

Net income per unit = Net income/ Number of units sold

= 1,755,000/117,000

= $15

Target selling price per unit = $88

Target cost per unit = Target selling price per unit -Net income per unit

= 88-15

= $73

the target cost for one LittleLaser = $73

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