Question

Aguilar Company is a priceminus−taker and uses target pricing. Refer to the following​ information: Production volume 601 comma 000601,000 units per year Market price $ 30$30 per unit Desired operating income 1616​% of total assets Total assets $ 13 comma 700 comma 000$13,700,000 Variable cost per unit $ 19$19 per unit Fixed cost per year $ 5 comma 400 comma 000$5,400,000 per year With the current cost​ structure, Aguilar 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 unit per​ year? Assume all units produced are sold.​ (Round your answer to the nearest​ cent.)

Answer 1

Target variable costs/ unit /year = $17.37

Step-by-step explanation:

We reverse work this to get to target variable costs,

First lets summarize the data,

Production = 601,000 units

Price = $30

Variable cost = $19

Fixed Costs= $5,400,000

Desired operating income @ 16% = (0.16*13,700,000) = $2,192,000

We reverse work this as,

Sales (601,000*30) 18,030,000

Less Variable costs(GP - Sales) 10,438,000

Gross Profit (FC + Profit) 7,592,000

Less Fixed Costs 5,400,000

Profit 2,192,000

Variable costs/ unit /year = 10,438,000 / 601,000 = $17.37/unit

Hope that helps.