Rica Company is a price-taker and uses target pricing. Refer to the following information: $$\begin{array} { | l | r | l | }
\hline \text { Production volume } & 600,000& \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,900,000 & \
\hline \text { Variable cost per unit } & \$ 18 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \
\hline
\end{array}$$ With the current cost structure, Rica cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs cannot be reduced, how much will be the target variable costs per unit per year? (Round your answer to the nearest cent.)

Question

Rica Company is a price-taker and uses target pricing. Refer to the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Production volume } & 600,000& \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,900,000 & \
\hline \text { Variable cost per unit } & \$ 18 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \
\hline
\end{array}$$ With the current cost structure, Rica cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs cannot be reduced, how much will be the target variable costs per unit per year? (Round your answer to the nearest cent.)

Quizplus · Accepted Answer

First, we need to calculate the target cost per unit, which is the total cost per unit that would allow the company to achieve its profit goal.

Operating income = Total assets * Desired operating income 
Operating income = $13,900,000 * 15\% = $2,085,000

Target cost per unit = Market price - Desired profit per unit 
Target cost per unit = $30 - ($2,085,000 / 600,000) 
Target cost per unit = $26.55

Next, we can use the target cost per unit to determine the target variable cost per unit:

Target variable cost per unit = Target cost per unit - Fixed cost per unit 
Target variable cost per unit = $26.55 - ($5,600,000 / 600,000) 
Target variable cost per unit = $17.19

Therefore, the answer is C, $17.19. This means that Rica would need to reduce its variable costs from $18 to $17.19 per unit in order to achieve its profit goal, assuming fixed costs cannot be reduced.

Rica Company Is a Price-Taker and Uses Target Pricing With the Current Cost Structure, Rica Cannot Achieve Its Profit