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

question 184

Multiple Choice

Kerr Productions is a price-taker.The company produces large spools of electrical wire in a highly competitive market; thus,it uses target pricing.The current market price is $800 per unit.The company has $3,000,000 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: $$\begin{array} { | l | r | l | } \hline \text { Sales volume } & 100,000 & \text { units per year } \\\hline \text { Variable costs } & \$ 725 & \text { per unit } \\\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \\\hline\end{array}$$ 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 achieve the desired target? (Round your answer to the nearest cent.)

• A)reduction in variable cost per unit by $725.00
• B)reduction in variable cost per unit by $75.00
• C)reduction in variable cost per unit by $65.00
• D)reduction in variable cost per unit by $67.40

---

Definitions:

Maturity Value

The total amount payable to an investor at the end of a fixed-term investment, including principal and any accrued interest.

Discounted Note

A debt instrument sold for less than its face value that will pay the face value at maturity.

Proceeds

Maturity value less bank discount.