Smith and Company is considering adding a bike to its current product line. John, the top 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 $8,660,060 and sales are expected to be 40,660 units of the bike per year. Compute the target cost of a bike. What does this target cost mean for Smith and Company? Minimum ROI (25%) - $2,666,666 $2,666,660 / 46,606 units = $56funit (Desired Profit) Target Cost: If Selling Price at $139: $139 - $56 - $89 CH Ratio: $56 I $139 = 6.3597 or 35.97%

The target cost of a bike = $89 

(Your answer is correct)

Step-by-step explanation

Consider the 40000 units sales of bikes per year, at a minimum price of $139

a. Total Sales = 40000 x $ 139 = $5560000

Compute for the investment of $8000000 and minimum return of 25% on its investments

b. Minimum Return = Investment x ROI = $8000000 x 025 = $2000000 = Total profit

Since we computed on part a and b that,

Total Sales = $5560000

Total Profit = $2000000

The difference between these two amounts is the overall target cost.

Target Cost=$5560000 - $2000000=$3560000

Since the expected sales per year = 40000 units, we have

Target cost per unit = $3560000 / 40000 = $89

Target cost per unit = $89 

This means that Smith and Company should manage that the cost per unit will not go beyond $89. 

If the cost is greater than $89, then the target amount of return of investment or profit will reduce and will not be met.