Dynamo Company Is a Price-Taker Currently the Cost Structure Is Such That the Company Cannot

question 179

Essay

Dynamo Company is a price-taker.The company produces generators in a highly competitive market; thus,it uses target pricing.The current market price is $600 per unit.The company has $18,500,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information:
$$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 65,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 500 & \text { per unit } \\\hline \text { Fixed costs } & \$ 7,500,000 & \text { per year } \\\hline\end{array}$$ Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs.If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the desired target? Show all computations.

---

Definitions:

Substitution Effect

Variations in consumer purchasing patterns as a result of shifting prices among products, which leads to the exchange of one good for another.

Apple Consumption

Refers to the quantity of apples eaten or utilized over a specified period of time.

Substitution Effect

refers to the change in consumption patterns due to a change in relative prices, leading consumers to substitute more expensive goods with cheaper alternatives.

Money Income

The total amount of monetary earnings or receipts accruing to an individual or household within a specified period.