Fantabulous Products sells 2,000 kayaks per year at a price of $450 per unit. Fantabulous sells in a highly competitive market and uses target pricing. The company has $1,000,000 of assets and the shareholders wish to make a profit of 18% on assets. Fixed costs are $500,000 per year and cannot be reduced. How much is the target variable costs?

Question

Quizplus · Accepted Answer

The target profit is 18% of $1,000,000, which is $180,000. Total revenue is 2,000 kayaks * $450 = $900,000. Total costs must be $900,000 - $180,000 = $720,000. Fixed costs are $500,000, so target variable costs are $720,000 - $500,000 = $220,000.

Fantabulous Products Sells 2,000 Kayaks Per Year at a Price