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 target full product cost in total for the year? Assume all units produced are sold.

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 target full product cost in total for the year? Assume all units produced are sold.

Quizplus · Accepted Answer

Target full product cost per unit = Market Price – Desired Operating Income per unit
Desired Operating Income = 15% * Total Assets = 0.15 * $13,900,000 = $2,085,000
Target Full Product Cost per unit = $30 - $2.085 = $27.915
Total Target Full Product Cost = 600,000 units * $27.915 per unit = $15,915,000. Therefore, the target full product cost in total for the year is $15,915,000.

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