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Dear Sir,
I hope you are doing well.
Question 31 (BPP Exam Kit)
Target mark-up 25%, sells with market price $120/unit. Company’s current cost/unit are $46 (variable cost) and $60 (fixed cost) with budgeted output of 10,000 units.
What is the minimum production required to close the target cost gap?I managed to get target cost = $96
But don’t have any idea on how to adjust the variable costs.Answer: 12,000 units
Thank you for your time
The variable cost is not adjusted – it stays at $46 per unit.
However since the total fixed cost must, by definition, stay at the budgeted total ($600,000), then if the production level changes then the fixed cost per unit will change.
To achieve the target cost of $96, the fixed cost per unit will have to be 96 – 46 = $50.
For the fixed costs to absorb at the rate of $50 per unit, the production will have to be 600,000/50 = 12,000 units.
Thanks a lot Sir
Saved a lot of my thinking time
Truly appreciate your kind responseHave a nice day
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