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

question 27

Multiple Choice

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

Premature

Occurring before the expected time or before the completion of the normal gestation period, often used to describe early birth.

Full-Term

Referring to a pregnancy that has reached between 39 and 40 weeks of gestation, indicating that the baby is fully developed and ready for birth.

Very Low Birth Weight

A term used to describe babies who are born weighing less than 1500 grams (3 pounds, 4 ounces).

Pounds

A unit of weight commonly used in the United States and the United Kingdom, equivalent to 0.453592 kilograms.