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This question is from the bpp exam kit question 31 i dont understand in the answers where they got 50 as the fixed cost and why they divided the budgeted fixed by the fixed cost
A company has a target mark up of 25% and sells into a competitive market where the market price is $120
per unit. The company’s current costs per unit are $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 the target cost gap?
A 11,778 units
B 13,636 units
C 11,042 units
D 12,000 unitsGiven that they require the profit to be 25% of cost, the target cost must be 100/125 x $120 = $96.
We know from the question that the variable cost is $46 per unit and so to hit target cost the fixed costs per unit have to be 96 – 46 = $50 per unit.
They budgeted on the total fixed costs as being 10,000 x $60 = $600,000, and by definition the total will remain at $600,000 however many they produce.
For the fixed costs per unit to be $50, they will therefore have to produce 600,000/50 = 12,000 units.
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