Murray Products sells 2,100 kayaks per year at a price of $470 per unit. Murray sells in a highly competitive market and uses target pricing. The company has $990,000 of assets and the shareholders wish to make a profit of 16% on assets. Fixed costs are $500,000 per year and cannot be reduced. Assume all products produced are sold. What are the target variable costs

The target variable costs amounts to $328,600

Explanation:

The target variable costs is computed as:

Computing Target full product cost as:

Target full product cost = Revenue at market price - Desired profit

where

Revenue at market price = Product * Price per unit

= 2100 * $470

= $987,000

Desired profit = Assets * Profit on assets

= $990,000 * 16%

= $158,400

Putting the values above:

Target full product cost = $987,000 - $158,400

Target full product cost = $828,600

Computing target variable cost as:

Target variable cost = Target full product cost - Fixed cost

= $828,600 - $500,000

Target variable cost = $328,600