Fargo Auto Supply, Inc. produces and distributes auto supplies. The company is anxious to enter the rapidly growing market for long-life batteries that is based on lithium technology. Management believes that to be fully competitive, the price of the new battery that the company is developing cannot exceed $75. At this price, management is confident that the company can sell 60,000 batteries per year. The batteries would require an investment of $3,000,000, and the desired ROI is 20%.
a) Compute the target cost of one battery.
b) If Fargo were to lower the price of the battery to $70, demand for the battery would increase to 75,000 batteries. The investment required would increase to $3,200,000 and the ROI would be 25%. Compute the target cost of one battery with these new parameters.
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