Question

Donnelley Products sells 2,500 kayaks per year at a sales price of $470 per unit.Donnelley sells in a highly competitive market and uses target pricing. The company has $1,000,000 of assets, and the shareholders wish to make a profit of 16% on assets. Variable cost is $180 per unit and cannot be reduced. Assume all products produced are sold. What are the target fixed costs?

Answer 1

Fixed Cost = 565,000

Step-by-step explanation:

We need to check the fixed cost which provides our target profit.

considering the formula for net income under variable cost is:

contribution margin - fixed cost = net income

Our target income will be the assets times their expected return

1,000,000 x 16% = 160,000

The contribution margin will be the sales revenue less variable cost times the forecast kayak sales

`Sales \: Revenue - Variable \: Cost = Contribution \: Margin`

470-180 = 290

budgeted unit sales

total contribution margin = 290 x 2,500 = 725,000

Now we post the values on the formula and solve for Fixed Cost

Contribution - Fixed Cost = Income

725,000 - Fixed Cost = 160,000

725,000 - 160,000 = Fixed Cost

Fixed Cost = 565,000