Question

Donnelley Products sells

2 comma 1002,100

kayaks per year at a sales price of

$ 500$500

per unit. Donnelley sells in a highly competitive market and uses target pricing. The company has

$ 800 comma 000$800,000

of? assets, and the shareholders wish to make a profit of

1616?%

on assets. Variable cost is

$ 190$190

per unit and cannot be reduced. Assume all products produced are sold. What are the target fixed? costs?

A.

$ 523 comma 000$523,000

B.

$ 1 comma 050 comma 000$1,050,000

C.

$ 922 comma 000$922,000

D.

$ 128 comma 000$128,000

Answer 1

A.

$ 523 comma 000$523,000

Working:

a.	Target profit	=	Assets x Target profit	=	$          8,00,000	x	16%	=	$       1,28,000
b.	Target Sales		2100 x $ 500	=	$       10,50,000
	Less:Target Variable Cost		2100 x $ 190		$          3,99,000
	Target Contribution Margin				$          6,51,000
	Less:Target Net Profit				$          1,28,000
	Target Fixed Costs				$          5,23,000