Cassa Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | r | l | }
\hline \text { Production volume } & 601,000 & \text { units per year } \
\hline \text { Market price } & \$ 32 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,900,000 & \
\hline \text { Variable cost per unit } & \$ 20 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \
\hline
\end{array}$$ With the current cost structure,Cassa 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

Cassa Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Production volume } & 601,000 & \text { units per year } \
\hline \text { Market price } & \$ 32 & \text { per unit } \
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,900,000 & \
\hline \text { Variable cost per unit } & \$ 20 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \
\hline
\end{array}$$ With the current cost structure,Cassa 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.

Quizplus · Accepted Answer

The target variable costs per year can be calculated by first determining the desired operating income, which is 15% of total assets ($13,900,000), resulting in $2,085,000. The total revenue is the production volume (601,000 units) multiplied by the market price ($32), equaling $19,232,000. To achieve the desired operating income, total costs (fixed + variable) must be the total revenue minus the desired operating income, which is $19,232,000 - $2,085,000 = $17,147,000. Since fixed costs are $5,600,000, the target variable costs are $17,147,000 - $5,600,000 = $11,547,000.

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