Determinant Company is a price-taker and uses a target-pricing approach. Refer to the following information: $$\begin{array} { | l | r | l | }
\hline \text { Production volume } & 600,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,700,000 & \
\hline
\end{array}$$ What is the target full product cost in total for the year? Assume all units produced are sold.

Question

Determinant Company is a price-taker and uses a target-pricing approach. Refer to the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Production volume } & 600,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,700,000 & \
\hline
\end{array}$$ What is the target full product cost in total for the year? Assume all units produced are sold.

Quizplus · Accepted Answer

The desired operating income is 15% of total assets, which is 15% of $13,700,000 = $2,055,000. The total revenue needed to achieve this operating income is the sum of the desired operating income and the total assets, which is incorrect. Instead, the total revenue is the market price ($30) times the production volume (600,000 units), which equals $18,000,000. To find the target full product cost in total for the year, subtract the desired operating income from the total revenue: $18,000,000 - $2,055,000 = $15,945,000.

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