Gotham Products Is a Price-Taker and Uses Target Pricing Actual Costs Are Currently Higher Than Target Full Product Cost

question 119

Multiple Choice

Gotham Products is a price-taker and uses target pricing. Gotham has just done an analysis of their revenues, costs and desired profits, and has calculated its target full product cost. Refer to the following information: $\begin{array}{|l|c|r|}\hline\text { Target full product cost } & \$ 500,000& \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 &\text { per year } \\\hline \text { Actual variable cost } & \$ 2 &\text { per unit } \\\hline \text { Production volume } & 150,000 &\text { units per year }\\\hline\end{array}$

Actual costs are currently higher than target full product cost. Assuming that fixed costs cannot be reduced, how much is the target variable cost per unit?

• A) $1.20
• B) $1.47
• C) $1.33
• D) $3.33

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Definitions:

Standard Costs

Predetermined costs for materials, labor, and overhead that are used as benchmarks to measure actual performance and cost control.

Materials Quantity Variance

The difference between the actual quantity of materials used in production and the standard quantity expected to be used, multiplied by the standard cost per unit.

Direct Materials Purchases Variance

The difference between the actual costs of materials purchased and the expected (standard) costs.

Variable Overhead

Costs that fluctuate with changes in production volume, such as utilities or indirect materials, which are part of the overall overhead but vary with the level of output.