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Hewlett plc is about to launch a new product on which it requires a pre-tax ROI of 30% p.a..
Buildings and equipment needed for production will cost $5,000,000.
The expected sales are 40,000 units p.a. at a selling price of $67.50 p.u..
Calculate the target cost.solution: Target return = 30% × 5M = $1.5M p.u.
Expected revenue = 40,000 × $67.50 = $2.7M
Target cost = (2.7M – 1.5M) / 40000 = 30 p.uDear sir, I could not understand how here target return 1.5M derived from building and equipment cost.
I will answer your question, but in future if you want me to answer then you must ask in the Ask the Tutor Forum – this forum is for students to help each other.
The question says that they require a return on investment of 30%. Since the investment required is $5M, the profit they need is 30% x $5M = $1.5M
(I trust that you are watching the lectures in addition to using the lecture notes. There is no point in using the lecture notes on their own – that is not enough to pass the exam – it is in the lectures that we explain and expand on the lecture notes.)
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