Symphony Sound, is designing a portable recording studio to be sold to consumers. The team developing the product includes representatives from marketing, engineering, and cost accounting. The recording studio set will include sound-canceling monitor headphones, audio recording and enhancement software, several instrumental and vocal microphones, and portable folding acoustic panels. With this set of features, the team believes that a price of $4,000 will be attractive in the market place. Symphony Sound seeks to earn a per unit profit of 20 percent of selling price.
Questions
a. Calculate the target cost per unit.
b. The team has estimated that the fixed production costs associated with the product will be $1,860,000 and variable costs to produce and sell the item will be $2,500 per unit. In light of this how many units must be produced and sold to meet the target cost per unit?
c. Suppose the company decides that only 2,000 units can be sold at a price of $4,000 and, therefore, the target cost cannot be reached. The company is considering dropping the folding acoustic panels, which add $750 of variable costs per unit. With this feature dropped, the company believes it can sell 2,700 units at $3,200 per unit. Will Symphony Sound be able to produce the item at the new target cost or less?