Question

Summit Products, Inc. is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $90 for such a widget and that 50,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $65. If Summit Products requires a 25% return on sales to undertake production, what is the target cost for the new widget?

Answer 1

$60

Step-by-step explanation:

The computation of the target cost for the new widget is shown below:

Target selling price = $80

return on sales = 25%

Based on this

Profit per unit = 80 × 25%

= $20

Now

Target cost = Target selling price - Profit per unit

= $80 - $20

= $60

By deducting the profit per unit from the target selling price we can get the target cost and the same is applied and shown above i.e in the computation part