Maxi Production Is a Price-Taker -
Currently the Cost Structure Is Such That the Company

Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in assets and shareholders expect a return of 5% on assets. The company provides the following information:
$$\begin{array} { | l | r | r | } \hline \text { Sales volume } & 90,000 & \text { Units per year } \\\hline \text { Variable costs } & \$ 680 & \text { Per unit } \\\hline \text { Fixed costs } & \$ 12,000,000 & \text { Per year } \\\hline\end{array}$$
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Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed costs cannot be reduced, how much reduction in total variable costs will be needed to achieve the profit target?

A) Reduce variable costs by $1,300,000
B) Reduce variable costs by $1,050,000
C) Reduce variable costs by $990,000
D) Reduce variable costs by $1,200,000

Correct Answer:

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