Fowler Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | l | l | }
\hline \text { Production volume } & \$ 00,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 17 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,700,000 & \
\hline \text { Variable cost per unit } & \$ 17 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \
\hline
\end{array}$$ With the current cost structure,Fowler cannot achieve its profit goals.It will have to reduce either the fixed costs or the variable costs.Assuming that variable costs cannot be reduced,what are the target fixed costs per year? Assume all units produced are sold.

Question

Fowler Company is a price-taker and uses target pricing.Refer to the following information: $$\begin{array} { | l | l | l | } 
\hline \text { Production volume } & \$ 00,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating income } & 17 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,700,000 & \
\hline \text { Variable cost per unit } & \$ 17 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \
\hline
\end{array}$$ With the current cost structure,Fowler cannot achieve its profit goals.It will have to reduce either the fixed costs or the variable costs.Assuming that variable costs cannot be reduced,what are the target fixed costs per year? Assume all units produced are sold.

Quizplus · Accepted Answer

First, calculate the desired operating income: 17% of total assets = 0.17 * $13,700,000 = $2,329,000. Next, calculate total revenue: $30 * 100,000 units = $3,000,000. Then, calculate total variable costs: $17 * 100,000 units = $1,700,000. To achieve the desired operating income, subtract the desired operating income and total variable costs from total revenue to find the target fixed costs: $3,000,000 - $2,329,000 - $1,700,000 = $5,471,000.

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