Rica Company Is a Price-Taker and Uses Target Pricing With the Current Cost Structure, Rica Cannot Achieve Its Profit

question 158

Multiple Choice

Rica Company is a price-taker and uses target pricing. Please refer to the following information: $$\begin{array} { | l | r | l | } \hline \text { Production volume } & 600,000& \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating income } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000 & \\\hline \text { Variable cost per unit } & \$ 18 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,600,000 & \text { per year } \\\hline\end{array}$$ With the current cost structure, Rica 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, how much will be the target variable costs per year?

• A) $10,315,000
• B) $5,115,000
• C) $5,600,000
• D) $5,200,000

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Definitions:

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