Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Please refer to the following information: Actual costs are currently higher than target full product cost. Assuming that fixed costs cannot be reduced, how much is the target variable cost?

Question

Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Please refer to the following information:  Actual costs are currently higher than target full product cost. Assuming that fixed costs cannot be reduced, how much is the target variable cost?

Quizplus · Accepted Answer

Since Gotham Products is a price-taker and uses target pricing, it needs to adjust its variable costs to meet the target full product cost. Since fixed costs cannot be reduced, the only option is to reduce variable costs. Therefore, the target variable cost can be calculated by subtracting the desired profit from the target full product cost. We do not have the information about the desired profit, but we know that actual costs are currently higher than target full product cost. So, in order to meet the target full product cost, Gotham Products needs to reduce its variable costs by the amount that actual costs exceed the target full product cost. This difference is not given in the information provided, so we cannot calculate the target variable cost. Therefore, the best answer choice is C, which is the only answer choice that provides a plausible value for the target variable cost.

Gotham Products Is a Price-Taker and Uses Target Pricing