Target Costing
Free Riders Inc. is considering adding a scooter to its motorcycle line-up. Management will negotiate the price of the scooter with its manufacturer.
Management of Free Riders believes the scooters can be sold to its customers for $4,000 each. At that price, annual sales of the scooters should be 200 units. If the scooters are added to Free Riders' product lines, the company will have to invest $200,000 in inventories and spe- cial warehouse fixtures. The variable cost of selling the scooters will be $1,000 per unit.
Required:
1. If Free Riders requires a 20% ROI, what is the maximum amount the company would be willing to pay the manufacturer for the scooters?
2. After many hours of negotiations, management has concluded that the manufacturer is unwilling to sell the scooters at a low enough price for Free Riders to earn its 20% required ROI. Apart from simply giving up on the idea of adding the scooters to Free Riders' product lines, what could management do?