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Evaluation Of Profit Margin, Costs And Revenue For A New Product

Question

Felix Pty Ltd has commenced production of a calorie-reduced product (‘Lean Snackos’) for obese pets. It has decided to use target costing in order to obtain a satisfactory return on investment. The latest product life cycle estimates of the revenues, costs and profit margin for ‘Lean Snackos’ are as follows:

 

Per Unit

Year 0

Year 1

Year 2

Year 3

Revenue ($)

8

 

80,000

120,000

140,000

Variable Costs ($)

2

 

20,000

30,000

35,000

Fixed Costs

 

19,000

48,000

60,000

60,000

Profit Margin Target

20%

 

 

 

 

Based on Felix Pty Ltd’s requirements, which one of the following statements is correct?

A. The profit margin target is achieved if the original estimates are accurate.

B. The price per unit should be increased to ensure that the profit margin target is achieved in each year.

C. Based on these estimates, the product will exceed the required profit margin target by $19,000 which means the price per unit may be too high.

D. The profit margin target is only achieved in the second and third years, therefore costs need to be reduced.

 

Summary

This multiple choice question belongs to Finance and the question discusses about a company that wants to produce calorie-reduced product for obese pets. The product life cycle estimates of the revenues, cost and profit margin are to be evaluated.

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