Dyggur Traders wishes to earn a 20% return on its $100,000 investment in equipment used to produce dog toys. The fixed costs cannot be changed, but the company wants to set a target cost for the variable portion. Based on estimated sales of 10,000 toys next year, the price and fixed costs per unit are: Price $9.00
Fixed selling and administrative costs 2.00
Fixed manufacturing cost 1.00
What is the target variable cost per unit?

Question

Quizplus · Accepted Answer

To calculate the target variable cost per unit, we need to first calculate the target profit per unit.

Target profit per unit = Target return on investment / Estimated number of units 
Target profit per unit = 20% of $100,000 / 10,000 units 
Target profit per unit = $20,000 / 10,000 units 
Target profit per unit = $2

Next, we can use the target profit per unit to calculate the target variable cost per unit.

Target variable cost per unit = Price per unit - Fixed costs per unit - Target profit per unit 
Target variable cost per unit = $9.00 - $3.00 - $2.00 
Target variable cost per unit = $4.00

Therefore, the target variable cost per unit is $4.00, and the best choice is C.

Dyggur Traders Wishes to Earn a 20% Return on Its