Acton Company is a price-taker and uses target pricing. Refer to the following i

Question

Acton Company is a price-taker and uses target pricing. Refer to the following information: With the current cost structure, Acton cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that variable costs cannot be reduced, what are the target fixed costs per year? Assume all units produced are sold. Production volume Market price Desired operating income Total assets Variable cost per unit Fixed cost per year 602.000 units per year 30 per unit 15% of total assets $13.800.000 $18l per unit $5.500,000 per year e Minimized View |Ver: 2.8.28

Explanation / Answer

Answer:-

Where:-

Required Desired operating income = 15% of Total Assets

Total Assets = $13800000

Desired operating income=15%*$13800000 = $2070000

Current Opreating income=$1724000

Shortfall in operating income =$2070000-$1724000 = $346000

Hence Target Fixed cost per year will be = $5500000-$346000 = $5154000

Hence to achieve operating income of $2070000 Acton company should have to reduce fixed cost by $346000 per year.

Statment of Current Opreating Income of Acton company Particulars Amount $ Sales 602000 units*$30 per unit 18060000 Less:- Variable cost 602000 units*$18 per unit 10836000 Contribution 7224000 Less:- Fixed costs 5500000 Opreating Income 1724000

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