Smith and Company is considering adding a bike to its current product line. john, the too manager believes that in order to be competitive, the bike cannot be priced above $139. The company requires a minimum return of 25% on its investments, Launching the new bike would require an investment of $8,000,000 and sales are expected to be 40,000 units of the bike per year. Compute the target cost of a bike. What does this target cost mean for Smith and Company?

Please see below.

Step-by-step explanation

Given:

Investment = $8,000,000

Minimum return = 25% of investment

Expected units to be sold = 40,000

Target price of bike = p

CVP stands for Cost - Volume - Profit and is type of accounting analysis done to determine what product lines should be pursued by a company. CVP relies on the work of cost accounting and can determine factors like pricing, production targets, and cost factors.

To get the price of bike:

(Price of bike) x (Expected units to be sold) = Investment + Minimum return

(p) x (40,000) = $8,000,000 + (0.25 x $8,000,000)

p = $250

Since the manager believes the price of bike cannot be priced above $139, Smith and Company should not pursue the new bike line.