SMB Company recently began production of a new product, Q, which required an investment of $2,500,000 in assets. The costs of producing and selling 100,000 units of Product Q are estimated as follows:

Using the cost-plus approach to product pricing, a 12% return on invested assets is required.

a. Determine the amount of desired profit from the production and sale of Product Q.

b. Using the product cost method, determine (1) the cost per unit, (2) the markup percentage, and (3) the selling price.

c. If the market price for a similar product is estimated at $61, compute the reduction in manufacturing cost per unit needed to maintain (1) the desired profit [from part (a)] and (2) the existing selling and administrative expenses under target costing.

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Variable costs: Direct materials Direct labor Factory overhead Selling and administrative expenses Total variable costs Fixed costs: Factory overhead Selling and administrative expenses $18 per unit 16 6 4 $44 per unit $1,200,000 600,000