Fowler Company is a priceminustaker and uses target pricing. Refer to the following information: Production volume 602 comma 000 units per year Market price $ 30 per unit Desired operating income 17% of total assets Total assets $ 13 comma 900 comma 000 Variable cost per unit $ 17 per unit Fixed cost per year $ 5 comma 600 comma 000 per year With the current cost structure, Fowler 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.

The target fixed cost per year for Fowler company is $5,463,000

Explanation:

In this question, we are asked to calculate the target fixed cost for a company assuming that variable costs cannot be reduced and also all units produced are sold.

We start by calculating the revenue generated by the company.

602,000 units were produced and sold at a market price of $30. This means total revenue is;

602,000 * 30 = $18,060,000

We then proceed to subtract the desired operating income from the revenue. From the question, we can identify that the desired operating income is 17% of total asset, with total asset being $13,900,000

Desired operating income = 17/100 * $13,900,000 = $2,363,000

Subtracting desired operating income from recent yields: $18,060,000 - $2,363,000 = $15,697,000

To get the target fixed cost per year, we simply subtract variable cost from the difference.

Summarily, this mathematically means that; target fixed cost per year = Revenue - Desired operating income - variable cost

Variable cost = $17 per 602,000 units per year = 17 * 602,000 = $10,234,000

Target fixed cost per year = $15,697,000 - $10,234,000 = $5,463,000

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