Computing Target Costs, accounting homework help

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%.

  Required:

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.