Timax 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 $50. The company requires a return on investment of 25% on all new products. The plan is to produce and sell 20,000 watches each year. This would require a $500,000 investment. The target cost per watch would be:
A)$64.00
B)$25.00
C)$43.75
D)$39.00

Question

Quizplus · Accepted Answer

To calculate the target cost per watch, we first need to determine the required profit per watch:
Profit per watch = Required ROI on investment / Number of watches produced
Profit per watch = (25% x $500,000) / 20,000
Profit per watch = $62.50 / 20,000
Profit per watch = $3.125

Next, we can subtract the required profit per watch from the maximum allowable price to determine the target cost per watch:
Target cost per watch = Maximum allowable price - Required profit per watch
Target cost per watch = $50 - $3.125
Target cost per watch = $46.875

However, we should round up to ensure that the profit margin is achieved, so the best choice is C) $43.75.

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