Q182 Trans PLC estimates that a new product will sell in suf

Q18-2: Trans PLC estimates that a new product will sell in sufficient quantities to justify its manufacture at a selling price of £175. The company needs to invest £5 million to produce a quantity of 10,000 of these new products per year and requires a return on that investment of 12% per annum. The current prediction is that the product will cost £140 to manufacture. How should Trans reengineer its costs to achieve the target selling price and target rate of return?

Solution

Required profit = 5000000*12%= 600000 Required profit per unit = 600000/10000 = 60 Target cost = 175-60 = 115 The product needs to bere-engineered to reduce its cost of manufacture by 25 (140-115)