Ortiz Company is a price-taker and uses target pricing. Refer to the following information: $\begin{array}{|l|r|l|}
\hline \text { Production volume } & 600,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,900,000 & \
\hline \text { Variable cost per unit } & \$ 18 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,400,000 & \text { per year } \
\hline
\end{array}$ With the current cost structure, Ortiz 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 are the target variable costs per year? Assume all units produced are sold.

Question

Quizplus · Accepted Answer

To calculate the target variable costs per year, first determine the desired operating income: 15% of total assets = 0.15 * $13,900,000 = $2,085,000. The revenue from selling 600,000 units at $30 each is $18,000,000. To achieve the desired operating income, total costs (fixed + variable) must be revenue minus desired operating income: $18,000,000 - $2,085,000 = $15,915,000. With fixed costs at $5,400,000, the target variable costs are $15,915,000 - $5,400,000 = $10,515,000.

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