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. 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 per unit?

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. 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 per unit?

Quizplus · Accepted Answer

Since Gotham Products is a price-taker and uses target pricing, it cannot increase its selling price to cover the higher actual costs. Therefore, the only way to reach the target full product cost is to decrease the variable cost per unit. The target variable cost per unit can be calculated by subtracting the target profit per unit from the target full product cost and then dividing the result by the expected demand. The information provided does not include the expected demand, so this calculation cannot be performed directly. However, based on the options provided, the best choice is B, $1.47, as it is the closest to the middle of the range between the highest and lowest options.

Gotham Products Is a Price-Taker and Uses Target Pricing