Komatsu Mfg. Co. uses target return pricing and expects to sell 40,000 units of its product in the coming year. Its fixed costs will be $500,000 and its variable costs will be about $20 per unit. If Komatsu seeks to earn a 20 percent return on its investment of $500,000, what price should it charge?
A) $35.00
B) $32.50
C) $21.00
D) $22.50
E) $20.00

Question

Quizplus · Accepted Answer

The correct answer is A because the target price is calculated as follows:Target price = (Fixed costs + (Variable costs per unit * Number of units)) / (1 - Target return on investment)= ($500,000 + ($20 * 40,000)) / (1 - 0.20)= ($500,000 + $800,000) / 0.80= $1,300,000 / 0.80= $1,625,000= $35.00 per unit