Question

Mira Mesa Appliances makes and sells kitchen equipment for offices and hotel rooms. Mira Mesa management believes that a new model of refrigerator made out of a synthetic material would sell well at a price of $420 per unit. Labor costs are estimated at $48 per unit and overhead costs would be $56 per unit. The major uncertainty is the price of the synthetic material. Mira Mesa is in negotiations with several suppliers for the material. Because of the risk associated with the new product, Mira Mesa will only proceed if the estimated return is at least 25 percent of the selling price.

Required:

What is the most Mira Mesa can pay for the synthetic material per unit (refrigerator) and meet its profitability goal? (Do not round intermediate calculations.)

: Highest material price per unit? = ???

Answer 1

Answer = Let the price of the synthetic material be X.

Now the Profit is 25% of the Selling price i.e. 25%*420 = 105. the target profit is 105 per unit.

So, Selling Price- Labor Cost- Overhead cost-Cost of synthetic material = Profit

420-48-56-X = 105

X = 211.

The most Mira Mesa can pay 211 or less for the synthetic material per unit (refrigerator) and meet its profitability goal