Question

WellminusBread Grain Company is a priceminustaker and uses target pricing. The company has just done an analysis of its​ revenues, costs, and desired profits and has calculated its target full product cost. Assume all products produced are sold. Refer to the following​ information:

Target full product cost $500, 000 per year
Actual fixed cost $280, 000 per year
Actual variable cost $3 per unit
Production volume 150, 000 units per year

Actual costs are currently higher than target full product cost. Assume all products produced are sold. Assuming that variable costs are dependent on commodity prices and cannot be reduced, what is the target fixed cost?

(A) $450,000
(B) $220,000
(C) $50,000
(D) $500,000

Answer 1

Answer:

The correct answer is C.

Explanation:

Giving the following information:

Target full product cost $500, 000 per year

Actual fixed cost $280, 000 per year

Actual variable cost $3 per unit

Production volume 150, 000 units per year

We can't lower the variable cost. Therefore, the cost reduction must be on fixed costs.

Target cost= 500,000

Variable cost= $3*150,000 units= 450,000

Target fixed costs= 500,000 - 450,000= $50,000