Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 3

Oaks Auto Supply
Oaks Auto Supply just acquired a patent on an antifreeze recycler that flushes used antifreeze from a car, filters it, removes dissolved chemicals, and then returns it to the automobile without having to dispose of the old antifreeze or use new antifreeze. It is a cheaper and environmentally safer process than replacing the old antifreeze. The recycler will be sold to garages and auto service shops. The patent cost Oaks $2.2 million. The firm will have to invest another $12.6 million in plant, equipment, and working capital. Oaks has a pretax cost of capital of 20 percent. In order to achieve a dominant position in the recycler market, it must sell 2,960 units the first year. To achieve this level of sales, the firm forecasts that the sales price cannot exceed $2,500 per recycler. Variable selling commissions will be $500 per unit. Purchased parts are projected to cost $750 per unit.
Required:
Calculate the target conversion cost (labor and overhead) per recycler if Oaks is to achieve its sales projections and return on investment objectives.