Chapter 13, Problem 13.26P

Cost-plus, target pricing, working backward. The new CEO of Rusty Manufacturing has asked for information about the operations of the firm from last year. The CEO is given the following information, but with some data missing:

Total sales revenue	?
Number of units produced and sold	500,000 units
Selling price	?
Operating income	$180,000
Total investment in assets	$2,250,000
Variable cost per unit	$4,00
Fixed costs for the year	$2,500,000

1. 1. Find (a) total sales revenue, (b) selling price, (c) rate of return on investment, and (d) markup percentage on full cost for this product. Required
2. 2. The new CEO has a plan to reduce fixed costs by $225,000 and variable costs by $0.30 per unit while continuing to produce and sell 500,000 units. Using the same markup percentage as in requirement 1, calculate the new selling price.
3. 3. Assume the CEO institutes the changes in requirement 2 including the new selling price. However, the reduction in variable cost has resulted in lower product quality resulting in 5% fewer units being sold compared with before the change. Calculate operating income (loss).
4. 4. What concerns, if any, other than the quality problem described in requirement 3, do you see in implementing the CEO’s plan? Explain briefly.