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

question 129

Multiple Choice

Meson Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $3,000,000 in assets and shareholders expect a return of 6% on assets. The company provides the following information: $$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 100,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 700 & \text { per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \\\hline\end{array}$$ Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed costs cannot be reduced, how much reduction in variable cost per unit will be needed to hit the profit target?

• A) reduction in variable cost per unit by $120
• B) reduction in variable cost per unit by $1.80
• C) reduction in variable cost per unit by $20.30
• D) reduction in variable cost per unit by $21.80

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Definitions:

Cash Transactions

Financial exchanges or deals where the payment is made in cash at the time of the transaction.