Computing Target Costs Accounting Homework Help

Fargo AutoSupply, Inc. produces and distributes auto supplies.  The company is anxious to enter the rapidlygrowing market for long-life batteries that is based on lithiumtechnology.  Management believes that tobe fully competitive, the price of the new battery that the company isdeveloping cannot exceed $75.  At thisprice, management is confident that the company can sell 60,000 batteries peryear.  The batteries would require aninvestment of $3,000,000, and the desired ROI is 20%.

  Required:

a) Computethe target cost of one battery.

b) IfFargo were to lower the price of the battery to $70, demand for the batterywould increase to 75,000 batteries.  Theinvestment required would increase to $3,200,000 and the ROI would be 25%.Compute the target cost of one battery with these new parameters.

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