Question

EagleEye Company, a manufacturer of digital cameras, is considering entry into the digital binocular market. EagleEye Company currently does not produce binoculars of any style, so this venture would require a careful analysis of relevant manufacturing costs to correctly assess its ability to compete. The market price for this binocular style is well established at $136 per unit. EagleEye has enough square footage in its plant to accommodate the new production line, although several pieces of new equipment would be required; their estimated cost is $4,800,000. EagleEye requires a minimum ROI of 15% on any product line investment and estimates that if it enters this market with its digital binocular product at the prevailing market price, it is confident of its ability to sell 22,000 units each year.

Calculate the target cost per unit for entry into the digital binocular market. (Round your answer to 2 decimal places.)

Answer 1

Answer:- Calculation of targeted cost:-

Step:1:- As given in question that company required return on its investment is 15% which means that on its capital expenditure company requires 15% return.

Therefore, Expected investment made by company is $ 4,800,000

Hence Return on investment is $720,000 (i.e. $4800000 * 15%)

Step:2:- As given in question that company is in confident that it will sell 22000 units.

and current market price is $ 136 per units.

Revenue from selling of expected units = 22000 * 136 = $ 2,992,000

Step:3:- Target cost as follows:-

Therefore, if company earned revenue of $ 2,992,000 and want return on investment is $ 720,000

Therefore, target cost for 22000 units = Total Revenue - Return on investment

= 2992000 - 720000

= $ 2,272,000

Hence, Target cost per unit = Total Target cost / Total units

= 2272000 / 22000

  = $ 103.27