The management of Giammarino Corporation is considering introducing a new product--a compact barbecue. At a selling price of $82 per unit, management projects sales of 10,000 units. Launching the barbecue as a new product would require an investment of $70,000. The desired return on investment is 18%. The target cost per barbecue is closest to:
A) $96.76
B) $82.00
C) $80.74
D) $95.27

Question

Quizplus · Accepted Answer

To calculate the target cost per barbecue, we need to deduct the desired return on investment and the launching cost from total expected revenue.

Total expected revenue = Selling price x Projected sales = $82 x 10,000 = $820,000

Return on investment = Desired ROI x Launching cost = 0.18 x $70,000 = $12,600

Therefore, the target cost per barbecue = (Total expected revenue - Return on investment - Launching cost) / Projected sales
= ($820,000 - $12,600 - $70,000) / 10,000 
= $737,400 / 10,000
= $73.74

However, the target cost per unit should not include the desired ROI, as it is a markup and not a cost of the product. Therefore, the actual target cost per unit would be $73.74 - 18% of $73.74, which is $13.27.

Target cost per unit = $73.74 - $13.27 = $60.47

However, we need to add a profit margin to the target cost to achieve the desired ROI.

Profit margin = Desired ROI / Total expected revenue = $12,600 / $820,000 = 0.0153

Therefore, the target cost per unit with the profit margin would be:

Target cost per unit = $60.47 + 0.0153 x $820 
= $60.47 + $12.53 
= $73.00

Therefore, the closest option is C) $80.74.

The Management of Giammarino Corporation Is Considering Introducing a New