Question

Maize Water is considering introducing a water filtration device for its 20-ounce water bottles. Market research indicates that 1,000,000 units can be sold if the price is no more than $4. If Maize Water decides to produce the filters, it will need to invest $2,000,000 in new production equipment. Maize Water requires a minimum rate of return of 14% on all investments. Determine the target cost per unit for the filter. (Round answer to 2 decimal places, e.g. 10.50.)

Answer 1

Answer:

The target cost per unit is $3.44 per unit for the filter

Explanation:

Computing the target cost per unit of the filter as:

Computing revenue as:

Revenue = Maximum price per unit × Selling units

where

Maximum price per unit is $4

Selling units are 1,000,000

So,

Revenue = $4 × 1,000,000

Revenue = $4,000,000

The target profit is as:

Target Profit = Minimum rate of return × Revenue

Target Profit = 14% × $4,000,000

Target Profit = $560,000

Now, computing the target profit per unit as:

Target profit per unit = 14% of $4

Target profit per unit = 14% × $4

Target profit per unit = $0.56

Computing the Target cost as:

Target cost = Maximum price - Target profit per unit

Target cost = $4 - $0.56

Target cost = $3.44 per unit