On Point, Inc., is interested in producing and selling a deluxe electric pencil sharpener. Market research indicates that customers are willing to pay $40 for such a sharpener and that 20,000 units could be sold each year at this price. The cost to produce the sharpener is currently estimated to be $34.
a. If On Point requires a 16 percent return on sales to undertake production of a product, what is the target cost for the new pencil sharpener?
b. If a competitor sells basically the same sharpener for $36, what would On Point's target cost be to maintain a 16 percent return on sales?