Question

Ortiz Company is a price-taker and uses target pricing. Refer to the following information: Production volume 600,000 units per year Market price $30 per unit Desired operating income 15% of total assets Total assets $13,900,000 Variable cost per unit $18 per unit Fixed cost per year $5,400,000 per year With the current cost structure, Ortiz 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. $10,515,000 $10,800,000 $5,400,000 $15,915,000

Answer 1

Production Volume = 600,000 units
Fixed Cost = $5,400,000
Total Assets = $13,900,000
Desired Operating Income = 15% of Total Assets
Market Price per unit = $30

Desired Operating Income = 15% * $13,900,000
Desired Operating Income = $2,085,000

Sales Revenue = Production Volume * Market Price per unit
Sales Revenue = 600,000 * $30
Sales Revenue = $18,000,000

Total Cost = Sales Revenue - Desired Operating Income
Total Cost = $18,000,000 - $2,085,000
Total Cost = $15,915,000

Total Cost = Total Variable Costs + Total Fixed Costs
$15,915,000 = Total Variable Costs + $5,400,000
Total Variable Costs = $10,515,000

So, target variable costs per year is $10,515,000