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

question 141

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. Please refer to the following information: $$\begin{array} { | l | r | r|} \hline \text { Target full product cost } & \$ 500,000& \text { per year } \\\hline \text { Actual fixed cost } & \$ 280,000 &\text { per year } \\\hline \text { Actual variable cost } & \$ 2& \text { per unit } \\\hline \text { Production volume } & 150,000 &\text { units per year } \\\hline\end{array}$$ Actual costs are currently higher than target full product cost.
- Assuming that fixed costs cannot be reduced, how much is the target variable cost?

• A) $180,000
• B) $300,000
• C) $220,000
• D) $500,000

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Definitions:

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The proportion of a total amount of money levied for borrowing it, usually represented as an annual rate.

Pure Time Value

Pure time value is the concept in finance that money available now is worth more than the same amount in the future due to its potential earning capacity.

Term Structure

The relationship between interest rates (or yields) and different terms (or maturities) for debt securities.

Liquidity Premium

The additional return that investors require for holding securities with low liquidity, compensating them for the higher risk associated with difficulty in selling the asset quickly at its fair market value.