Meson Productions is a price taker. Meson produces large spools of electrical wire in a highly competitive market; thus, the company uses target pricing. The current market price of the electric wire is $770 per unit. The company has $3,000,000 in average assets, and the desired profit is a return of 5% on assets. Assume all products produced are sold. The company provides the following information:

Sales volume 110,000 units per year

Variable costs $660 per unit

Fixed costs $14,000,000 per year

If variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the profit target?

A. $7,750,000

B. $7,600,000

C. $12,150,000

D. $12,000,000

Instructions are below

Explanation:

Giving the following information:

The current market price of the electric wire is $770 per unit.

The company has $3,000,000 in average assets, and the desired profit is a return of 5% on assets.

Sales volume 110,000 units per year

Variable costs $660 per unit

Fixed costs $14,000,000 per year

The company's objective is 5% of average assets. In this case, $150,000.

Total contribution margin = 110,000*110 = 12,100,000

Fixed costs = (14,000,000)

Net operating profit = (1,900,000)

Target profit = 150,000

Target fixed costs = Contribution margin - target profit

Target fixed costs = 12,100,000 - 150,000 = 11,950,000

Prove:

Total contribution margin = 110,000*110 = 12,100,000

Fixed costs = (11,950,000)

Net operating profit = 150,000