Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Please refer to the following information: $\begin{array}{|l|c|r|}
\hline\text { Target full product cost } & \$ 500,000& \text { per year } \
\hline \text { Actual fixed cost } & \$ 280,000 &\text { per year } \
\hline \text { Actual variable cost } & \$ 2 &\text { per unit } \
\hline \text { Production volume } & 150,000 &\text { units per year }\
\hline
\end{array}$
Actual costs are currently higher than target full product cost. Assuming that variable costs are dependent on commodity prices and cannot be reduced, how much is the target fixed cost?

Question

Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Please refer to the following information: $\begin{array}{|l|c|r|}
\hline\text { Target full product cost } & \$ 500,000& \text { per year } \
\hline \text { Actual fixed cost } & \$ 280,000 &\text { per year } \
\hline \text { Actual variable cost } & \$ 2 &\text { per unit } \
\hline \text { Production volume } & 150,000 &\text { units per year }\
\hline
\end{array}$
 Actual costs are currently higher than target full product cost. Assuming that variable costs are dependent on commodity prices and cannot be reduced, how much is the target fixed cost?

Quizplus · Accepted Answer

Target full product cost = Actual fixed cost + (Actual variable cost per unit x Production volume)
$500,000 = $280,000 + ($2 x 150,000)
$500,000 = $280,000 + $300,000
$220,000 = Target fixed cost
Therefore, the target fixed cost is $220,000, which is closest to option C ($200,000).

Gotham Products Is a Price-Taker and Uses Target Pricing Actual Costs Are Currently Higher Than Target Full Product Cost