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8 October, 11:32

Outrigger Leisure Products sells 2,000 kayaks per year at a price of $450 per unit. Outrigger sells in a highly competitive market and uses target pricing.

The company has $1,000,000 of assets and the shareholders wish to make a profit of 16% on assets. Fixed costs are $475,000 per year and cannot be reduced.

Assume all products produced are sold.

What are the target variable costs?

A. $740,000

B. $1,000,000

C. $118,401

D. $265,000

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Answers (1)
  1. 8 October, 11:56
    0
    D. $265,000

    Explanation:

    As we know that,

    Net income = Sales revenue - variable cost - fixed cost

    where,

    Sales revenue equals to

    = Selling price per unit * Unit sales per month

    = $450 * 2,000 kayaks

    = $900,000

    Fixed cost = $475,000

    Net income equals to

    = Assets * profit percentage

    = $1,000,000 * 16%

    = $160,000

    Now put these values to the above formula

    So, the value would equal to

    $160,000 = $900,000 - variable cost - $475,000

    $160,000 = $425,000 - variable cost

    So, the target variable cost would be

    = $425,000 - $160,000

    = $265,000
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