Question

Outrigger Leisure Products sells 2,000 kayaks per year at a price of $450 per unit. Outrigger 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. Fixed costs are $475,000 per year and cannot be reduced.
Assume all products produced are sold.

What are the target variable costs?

A. $740,000

B. $1,000,000

C. $118,401

D. $265,000

Answer 1

D. $265,000

Step-by-step explanation:

As we know that,

Net income = Sales revenue - variable cost - fixed cost

where,

Sales revenue equals to

= Selling price per unit × Unit sales per month

= $450 × 2,000 kayaks

= $900,000

Fixed cost = $475,000

Net income equals to

= Assets × profit percentage

= $1,000,000 × 16%

= $160,000

Now put these values to the above formula

So, the value would equal to

$160,000 = $900,000 - variable cost - $475,000

$160,000 = $425,000 - variable cost

So, the target variable cost would be

= $425,000 - $160,000

= $265,000