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

question 29

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 per unit?

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

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Definitions:

BAT Model

Behaviorally Adjusted Time (BAT) Model refers to a calculation method designed to account for the inefficiencies human behavior introduces into the financial markets.

Optimum Initial Cash Balance

The ideal amount of cash a company needs on hand to operate efficiently without incurring excess costs or missing out on opportunities.

Monthly Disburses

The process of distributing or paying out funds from a budget or account, typically occurring on a monthly basis.

Miller-Orr Model

A financial model used to manage cash flow and determine optimal cash reserves for a company.