Question

Maize Water is considering introducing a water filtration device for its 20-ounce water bottles. Market research indicates that 1,056,600 units can be sold if the price is no more than $3. If Maize Water decides to produce the filters, it will need to invest $1,913,500 in new production equipment. Maize Water requires a minimum rate of return of 20% on all investments. Determine the target cost per unit for the filter. (Round answer to 2 decimal places, e.g. 10.50.)

Answer 1

Target cost per unit = $2.64

Expected market sales(10,56,600 × $3) $31,69,800

Less: required ROI(0.20 × $19,13,500) $3,82,700

Target cost for 1056600 units                              $27,87,100

÷ 10,56,600 Units

Target cost per unit $2.64

Or

Required ROI per unit(0.20 × $19,13,500)          $3,82,700

÷ 10,56,600 Units                                                = $0.36

Target cost per unit =    Market Price $3 – ROI $0.36 = $2.64