Pharma manufactures hospital beds. Its most popular model, Delu, sells for $5,000. It has variable costs totaling $2,650 and fixed costs of $1,200 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.

A competitor is introducing a new hospital bed similar to Delu that will sell for $3,800. Management believes it must lower the price to compete. The marketing department believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Delu beds it can produce.

Required:

a. What is the annual operating income from Delu at the current price of $5,000?

b. What is the annual operating income from Delu if the price is reduced to $3,800 and sales in units increase by 25%?

c. What is the target cost per unit for the new price if target operating income is 30% of sales?