Computing Target Costs, accounting homework help

Fargo Auto Supply, Inc. produces and distributes auto supplies.  The company is anxious to enter the rapidly growing market for long-life batteries that is based on lithium technology.  Management believes that to be fully competitive, the price of the new battery that the company is developing cannot exceed $75.  At this price, management is confident that the company can sell 60,000 batteries per year.  The batteries would require an investment of $3,000,000, and the desired ROI is 20%.


a)  Compute the target cost of one battery.

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