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

question 114

Multiple Choice

Rica Company is a price-taker and uses target pricing.Refer to the following information:
$$\begin{array} { | l | l | l | } \hline \text { Production volume } & \$601,000 & \text { units per year } \\\hline \text { Market price } & \$ 30 & \text { per unit } \\\hline \text { Desired operating profit } & 15 \% & \text { of total assets } \\\hline \text { Total assets } & \$ 13,800,000 & \\\hline \text { Variable cost per unit } & \$ 19 & \text { per unit } \\\hline \text { Fixed cost per year } & \$ 5,500,000 & \text { per year } \\\hline\end{array}$$
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 unit per year? (Round your answer to the nearest cent.)

• A) $19.00
• B) $4.50
• C) $17.40
• D) $11.00

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Definitions:

Price Ceiling

A government-imposed limit on the price charged for a product, to ensure that it remains affordable for consumers.

Price Floor

A minimum price set by the government or an organization for a particular good or service, below which it cannot be sold.

Demand Curve

A graphical representation showing the relationship between the price of a good or service and the quantity demanded for a given period, with price on the vertical axis and quantity on the horizontal axis.

Fixed Costs

Business expenses that are not affected by changes in the level of goods or services produced over the short term.