Cassa Company is a price-taker and uses target pricing

Question

Refer to the following information:

Production volume 601,000 units per year
Market price $32 per unit
Desired operating income 16% of total assets
Total assets $13,900,000
Variable cost per unit $20 per unit
Fixed cost per year $5,400,000 per year

With the current cost structure, Cassa cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs cannot be reduced, what are the target variable costs per year? Assume all units produced are sold.
A) $11,608,000
B) $12,020,000
C) $5,400,000
D) $17,008,000

Answer 1

A .A)
Revenue at market price ($32 x 601,000 )
Less: Desired profit ($13,900,000 x 16%) 2,224,000
Target full product cost $17,008,000

Less: Fixed costs $5,400,000
Variable costs $11,608,000