Timdat Corporation, a manufacturer of moderate-priced time pieces, would like to introduce a new electronic watch. To compete effectively, the watch could not be priced at more than $30. The company requires a return on investment of 25% on all new products. The plan is to produce and sell 40,000 watches each year. This would require a $600,000 investment. The target cost per watch would be:
A) $10.00
B) $20.00
C) $26.25
D) $45.00

Question

Quizplus · Accepted Answer

To determine the target cost per watch, we need to take into account the desired return on investment and the number of watches to be produced and sold.

First, let's calculate the target profit per watch:

$30 (selling price) x 25% (ROI) = $7.50

Next, let's calculate the total target profit for producing and selling 40,000 watches:

$7.50 x 40,000 = $300,000

To determine the target cost per watch, we subtract the target profit per watch from the selling price:

$30 - $7.50 = $22.50

Therefore, the target cost per watch is $22.50. However, this is above the maximum price of $30 that the watch can be sold for.

To adjust for this, we need to reduce the target cost. One way to do this is to reduce the ROI requirement. However, since that is not an option, we need to reduce the total investment required.

Since $600,000 is the maximum investment that the company is willing to make, we need to find a way to produce and sell 40,000 watches with a lower investment. One way to do this is to reduce the cost of goods sold (COGS), which includes the cost of materials, labor, and overhead.

Let's assume that the COGS per watch is $15. This means that the company will spend $15 x 40,000 = $600,000 to produce and sell 40,000 watches.

To achieve the desired ROI, the company will need to make a profit of $300,000, as calculated earlier. This means that the total cost per watch should be:

$15 (COGS) + $7.50 (target profit) = $22.50

Therefore, the best choice is C, with a target cost per watch of $26.25, which is within the maximum price limit of $30.

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