Abbott Company is a price-taker and uses target pricing.The company has just done an analysis of its revenues,costs,and desired profits and has calculated its target full product cost.Assume all products produced are sold.Refer to the following information: $$\begin{array} { | l | l | l | }
\hline \text { Target full product cost } & \$ 510,000 & \text { per year } \
\hline \text { Actual fixed cost } & \$ 280,000 & \text { per year } \
\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \
\hline \text { Production volume } & 152,000 & \text { units per year } \
\hline
\end{array}$$ Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,what are the target total variable costs?

Question

Abbott Company is a price-taker and uses target pricing.The company has just done an analysis of its revenues,costs,and desired profits and has calculated its target full product cost.Assume all products produced are sold.Refer to the following information: $$\begin{array} { | l | l | l | } 
\hline \text { Target full product cost } & \$ 510,000 & \text { per year } \
\hline \text { Actual fixed cost } & \$ 280,000 & \text { per year } \
\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \
\hline \text { Production volume } & 152,000 & \text { units per year } \
\hline
\end{array}$$ Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,what are the target total variable costs?

Quizplus · Accepted Answer

Since Abbott Company is a price-taker and uses target pricing, it has already calculated its target full product cost. However, it currently faces higher actual costs than the target full product cost. Since fixed costs cannot be reduced, the only option is to adjust the total variable costs. Therefore, the target total variable costs would be the difference between the target full product cost and the fixed costs. Based on the given information, the target total variable costs would be $230,000 (i.e., $510,000 - $280,000). Hence, the best choice is C.

Abbott Company Is a Price-Taker and Uses Target Pricing Actual Costs Are Currently Higher Than Target Full Product Cost