Answer:
$108.8 per unit
Explanation:
Given that,
Current market price of the electric wire = $700 per unit
Average assets = $3,200,000
Desired profit: Return on assets = 8%
Sales volume = 120,000 units per year
Current variable costs = $ 690 per unit
Fixed costs = $ 14,000,000 per year
Target profit:
= Average assets × Return on assets
= 3,200,000 × 8%
= $256,000
Let the target variable cost per unit be $X
Total variable cost:
= Number of units × Variable cost per unit
= 120,000 × X
= 120,000 X
Sales Revenue:
= Number of units sold × Selling price per unit
= 120,000 × $700
= $84,000,000
Profit = Sales Revenue - Total variable cost - Total fixed cost
$256,000 = $84,000,000 - 120,000 X - 14,000,000
X = $69,744,000 ÷ 120,000
= $581.2
Target variable cost per unit = $581.2
Reduction in variable cost per unit is calculated as follows:
= Current variable cost per unit - Target variable cost per unit
= $690 per unit - $581.2
= $108.8
Therefore, the reduction of $108.8 per unit in variable costs will be needed to achieve the desired target.
