Rica Company is a price-taker and uses a target-pricing approach. Refer to the following information: $$\begin{array} { | l | r | l | }
\hline\text { Production volume } & 600,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,900,000 & \
\hline
\end{array}$$ How much is the desired profit for the year?

Question

Rica Company is a price-taker and uses a target-pricing approach. Refer to the following information: $$\begin{array} { | l | r | l | } 
\hline\text { Production volume } & 600,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,900,000 & \
\hline
\end{array}$$ How much is the desired profit for the year?

Quizplus · Accepted Answer

Desired operating income = 15% of total assets

Desired profit = 0.15 x Total assets
Desired profit = 0.15 x $13,900,000
Desired profit = $2,085,000

Since Rica Company is a price-taker, it has to set its price based on the market price of $30 per unit. Using the target-pricing approach, the company needs to determine the necessary cost per unit to achieve the desired profit.

Target cost per unit = Market price - Desired profit per unit
Target cost per unit = $30 - ($2,085,000 / 600,000)
Target cost per unit = $26.50

Therefore, in order to achieve the desired profit of $2,085,000 with a production volume of 600,000 units per year and a market price of $30 per unit, Rica Company needs to set a target cost per unit of $26.50.

Rica Company Is a Price-Taker and Uses a Target-Pricing Approach