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A company has a target mark up of 25% and sells into a competitive market where market price is $120 per unit. the company’s current cost per unit is $46 for variable costs and $60 for fixed costs, and it has a budgeted output of 10,000 units.
What is the minimum production required to close target cost gap?
A.11,778 units
B. 13,636 units
C. 11,042 units
D. 12,000 unitsKindly assist and explain as I got stuck after arriving at the target cost of $96. I would be deceiving myself to claim I understand how the answer of 12,000 unit was achieved.
I have watched the lectures on target cost as well as done the practice test
Thank you.
The target cost is $96.
Given that the variable cost per unit is $46, the fixed cost per unit will have to be 96 – 46 = $50 per unit.
The budgeted total fixed costs are 10,000 x $60 = $600,000 and this total will stay the same by definition however many are actually produced.
For the fixed costs per unit to be $50, they will therefore have to produce 600,000/50 = 12,000 units.
(This is a combination of target costing with CVP analysis)
Thanks John for your detailed explanation. I see why I had challenges understanding the question, I haven’t studied CVP analysis.
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