Mira Mesa Appliances makes and sells kitchen equipment for offices and hotel roo

Question

Mira Mesa Appliances makes and sells kitchen equipment for offices and hotel rooms. Mira Mesa management believes that a new model of refrigerator made out of a synthetic material would sell well at a price of $270 per unit. Labor costs are estimated at $33 per unit and overhead costs would be $26 per unit. The major uncertainty is the price of the synthetic material. Mira Mesa is in negotiations with several suppliers for the material. Because of the risk associated with the new product, Mira Mesa will only proceed if the estimated return is at least 30 percent of the selling price.

Required:

What is the most Mira Mesa can pay for the synthetic material per unit (refrigerator) and meet its profitability goal? (Do not round intermediate calculations.)

Explanation / Answer

Required return per unit = 270*30%= $81 Target cost per unit = Selling price-Required return = 270-81= $189 Highest material price per unit = 189-33-26= $130

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