Redback Networks, Inc., a subsidiary of Ericsson, provides networking services a

Question

Redback Networks, Inc., a subsidiary of Ericsson, provides networking services and related systems for 75% of the world's largest telephone companies. Assume that it is developing a new networking system for smaller, private telephone companies. To attract small companies, Redback must keep the price low without giving up too many features of the large networking systems. A marketing research study conducted on the company's behalf found that the price range must be $50,000 to $75,000. Management has determined a target price to be $60,000. The company's minimum profit percentage of sales is normally 20 percent but the company is wiling to reduce it to 15 percent to get the new product on the market. The fixed costs for the first year are anticipated to be $8,000,000. If sales reach 500 installed networks, the company needs to know how much it can spend on variable costs, which are primarily related to installation.

a. What is the amount of total cost allowed if the 15 percent profit target is allowed and the sales target is met? Show the amount for fixed and variable costs. Show work.

Explanation / Answer

If Target SP = $60,000 Less 15% Profit on Sale = 15%*60000 = 9000 ---------------------------------- Net Income pu 51000 For 500 nos, Sales = 500*60000 = 30,000,000 Less 15% Profit = (4,500,000) ---------------------------------- Net Income 25,500,000 Less FC (8,000,000) ----------------------- Total VC 17,500,000 SO pu VC = 17,500,000/500 = $35,000 a. What is the amount of total cost allowed if the 15 percent profit target is allowed and the sales target is met? Show the amount for fixed and variable costs. Show work. SO Total Cost allowed is 17,500,000

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