Peacock Inc. sells 2,500 kayaks per year at a price of $500 per unit. It sells in a highly competitive market and uses target pricing. The company has calculated its target full product cost at $820,000 per year. Fixed costs are $350,000 per year and cannot be reduced. How much is the target variable cost per unit?

Question

Quizplus · Accepted Answer

We can use the target costing formula:
Target Full Product Cost = Target Variable Cost per Unit x Number of Units + Fixed Costs

Substituting the given values, we have:

$820,000 = Target Variable Cost per Unit x 2,500 + $350,000

Solving for Target Variable Cost per Unit, we get:

Target Variable Cost per Unit = ($820,000 - $350,000) / 2,500
Target Variable Cost per Unit = $188

Therefore, the best choice is A, with a target variable cost per unit of $188.