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18 May, 10:34

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.)

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  1. 18 May, 12:49
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    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
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