Question

Sparks Stationery 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:

Target full product cost $500, 000 per year
Actual fixed cost $280, 000 per year
Actual variable cost $3 per unit
Production volume 151, 000 units per year

Actual costs are currently higher than target full product cost. Assuming that fixed costs cannot be reduced, what is the target variable cost per unit? (Round your answer to the nearest cent.)

(A) $1.46
(B) $3.00
(C) $1.85
(D) $3.31

Answer 1

Answer:

Option (A) is correct.

Explanation:

Given that,

Target full product cost = $500,000 per year

Actual fixed cost = $280,000 per year

'Actual fixed cost cannot be reduced'

Actual variable cost = $3 per unit

Production volume = 151,000 units per year

Therefore,

Total target variable cost per unit cannot exceed:

$=\frac{Target\ full\ product\ cost-actual\ fixed\ cost}{Production\ volume}$

$=\frac{500,000-280,000}{151,000}$

$=\frac{220,000}{151,000}$

=  $1.46