Rica Company is a price-taker and uses target pricing.Refer to the following information:
-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,what will be the target variable costs per unit per year? Assume all units produced are sold.(Round your answer to the nearest cent.)

Question

Rica Company is a price-taker and uses target pricing.Refer to the following information:  
-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,what will be the target variable costs per unit per year? Assume all units produced are sold.(Round your answer to the nearest cent.)

Quizplus · Accepted Answer

With target pricing, the price is set first and then target cost is calculated. Since the company is a price-taker, the price is determined by the market and cannot be changed. Therefore, the only option is to reduce variable costs.

Target cost per unit = target price - desired profit per unit 
Target price = market price = $30 
Desired profit per unit = $6

Target cost per unit = $30 - $6 = $24

Target variable cost per unit per year = Total variable costs per year / Total units produced per year

Since we are assuming all units produced are sold, total units produced per year = total units sold per year

Target variable cost per unit per year = $24 - total fixed costs per year / total units sold per year

Since fixed costs cannot be reduced, we cannot calculate the exact target variable cost per unit. However, we can calculate the minimum target variable cost per unit required to achieve the target cost.

Minimum target variable cost per unit = $24 - ($60,000 / 10,000 units) = $18

Therefore, the best choice is C, $17.19 per unit per year, which is below the minimum target variable cost required to achieve the target cost.

Rica Company Is a Price-Taker and Uses Target Pricing