Baker Plumbing Fixtures is developing a pre-plumbed, acrylic shower unit. The team developing the product includes representatives from marketing, engineering, and cost accounting. To date, the team has developed a set of features that it plans on incorporating in the unit including a seat, two shower heads, four body sprays, and a steam unit. With this set of features, the team believes that a price of $5,000 will be attractive in the marketplace. Baker seeks to earn a per unit profit of 30 percent of selling price.
Calculate the target cost per unit.
The team has estimated that the fixed production costs associated with the product will be $2,000,000 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?
Suppose the company decides that only 1,400 units can be sold at a price of $5,000 and, therefore, the target cost cannot be reached. The company is considering dropping the steam feature, which adds $600 of variable cost per unit. With this feature dropped, the company believes it can sell 2,500 units at $4,000 per unit. Will Baker be able to produce the item at the new target cost or less?
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