Gotham Products is a price-taker and uses target pricing. Please refer to the following information: $$\begin{array} { | l | r | l | }
\hline \text { Production volume } & 300,000 & \text { units per year } \
\hline \text { Market price } & \$ 3 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 2,000,000 & \
\hline
\end{array}$$ How much is the target full product cost per year? Assume all units produced are sold.

Question

Gotham Products is a price-taker and uses target pricing. Please refer to the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Production volume } & 300,000 & \text { units per year } \
\hline \text { Market price } & \$ 3 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 2,000,000 & \
\hline
\end{array}$$ How much is the target full product cost per year? Assume all units produced are sold.

Quizplus · Accepted Answer

To calculate the target full product cost, we first need to calculate the target operating income:

Target Operating Income = Total Assets x Desired Operating Income 
Target Operating Income = $2,000,000 x 0.15 
Target Operating Income = $300,000

Next, we use the target operating income and the market price to calculate the target full product cost:

Target Full Product Cost = Market Price - Target Operating Income / Production Volume 
Target Full Product Cost = $3 - $300,000 / 300,000 
Target Full Product Cost = $3 - $1 
Target Full Product Cost = $2

Therefore, the target full product cost per year is $2 x 300,000 units = $600,000.

The best choice is B, as it is the only answer option that matches the calculated target full product cost.

Gotham Products Is a Price-Taker and Uses Target Pricing How Much Is the Target Full Product Cost Per Year