A custom kitchen cabinet storeowner wishes to use target profit pricing to establish a price for a typical section of cabinets. Assume variable cost is $200 per unit, fixed cost is $44,000, and the storeowner desires a target profit of 20 percent of sales on an annual volume of 400 cabinets. What price should be charged for a typical cabinet section?
A)$387.50
B)$311.00
C)$372.00
D)$395.75

Question

Quizplus · Accepted Answer

To achieve a target profit of 20% on sales, first calculate the total cost and the desired profit. Total cost = Fixed cost + (Variable cost per unit * Number of units) = $44,000 + ($200 * 400) = $44,000 + $80,000 = $124,000. Desired sales revenue to achieve a 20% profit margin = Total cost / (1 - Target profit margin) = $124,000 / (1 - 0.20) = $124,000 / 0.80 = $155,000. Price per unit = Desired sales revenue / Number of units = $155,000 / 400 = $387.50.

A Custom Kitchen Cabinet Storeowner Wishes to Use Target Profit