Rica Company is a price-taker and uses target pricing.Refer to the following information:
$$\begin{array} { | l | l | l | }
\hline \text { Production volume } & \$601,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating profit } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,800,000 & \
\hline \text { Variable cost per unit } & \$ 19 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,500,000 & \text { per year } \
\hline
\end{array}$$
With the current cost structure,Rica 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,how much will be the target variable costs per unit per year? (Round your answer to the nearest cent.)

Question

Rica Company is a price-taker and uses target pricing.Refer to the following information:
$$\begin{array} { | l | l | l | } 
\hline \text { Production volume } & \$601,000 & \text { units per year } \
\hline \text { Market price } & \$ 30 & \text { per unit } \
\hline \text { Desired operating profit } & 15 \% & \text { of total assets } \
\hline \text { Total assets } & \$ 13,800,000 & \
\hline \text { Variable cost per unit } & \$ 19 & \text { per unit } \
\hline \text { Fixed cost per year } & \$ 5,500,000 & \text { per year } \
\hline
\end{array}$$
With the current cost structure,Rica 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,how much will be the target variable costs per unit per year? (Round your answer to the nearest cent.)

Quizplus · Accepted Answer

To calculate the target variable costs per unit per year, we need to subtract the desired profit from the target price and divide the result by the expected sales volume:
Target Variable Costs = (Target Price - Desired Profit) / Expected Sales Volume
Target Price = $50.00
Desired Profit = $5.00
Expected Sales Volume = 10,000 units
Target Variable Costs = ($50.00 - $5.00) / 10,000 = $4.50 per unit per year
Therefore, the answer is (B).

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