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

question 180

Multiple Choice

Ortiz Company is a price-taker and uses target pricing. Refer to the following information: $\begin{array}{|l|r|l|}\hline \text { Production volume } & 600,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating income } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,900,000 & \\\hline \text { Variable cost per unit } & \$ 18 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,400,000 & \text { per year } \\\hline\end{array}$ With the current cost structure, Ortiz 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 year? Assume all units produced are sold.

• A) $10,515,000
• B) $10,800,000
• C) $5,400,000
• D) $15,915,000

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Definitions:

Total-Product Schedule

A table that shows the output of goods or services that a firm can produce with different combinations of input resources.

Constant Price

Prices adjusted for inflation to reflect the real value of goods and services over time.

Resource Employment

The utilization of various inputs like labor, capital, and raw materials in the production of goods and services.

Marginal Revenue Product

The additional revenue generated from employing one more unit of a resource or input.