The Handy Appliance Company believes that there is a market niche for a hand mixer
with certain new features. Surveying the features and price of hand mixers already on the
market, the Marketing Department believes that a price of $30.00 would be about right
for the new mixer. At that price, marketing estimates that 40,000 of the new mixers could
be sold annually. To design, develop and produce these new mixers, an investment of
$2,000,000 would be required. The company desires a 15 percent return on investment.
Required:
a.) Determine the target cost per mixer.
b.) Assuming that 60 percent of the cost is variable and 40 percent is fixed, determine the
operating income of the company, if the price of the mixer is increased to $40.00 and the
number of units sold decreases to 35,000. The company would reduce its investment to
$1,600,000, while still expecting to earn a 15 percent return on investment. Would they
meet their desired return on investment?