Reference no: EM132875843

Problem - Julia's PT Company manufactures PT equipment. Its most popular model, Flexibility, sells for $5,000. It has variable costs totaling $2,800 per unit and fixed costs of $1,000 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds. A competitor is introducing a new PT equipment similar to Flexibility that will sell for $4,000. Management believes it must lower the price to compete. Marketing believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Flexibility beds it can produce (i.e, no inventory).

Required -

a. What is the annual operating income from Flexibility at the current price of $5,000?

b. What is the annual operating income from Flexibility at the new price of $4,000?

c. If the selling price is reduced to $4,000, what is the target cost per unit for this new price if target operating income is 20% of sales?