EXERCISE5 Custom Touch Inc. produces high quality desk organizers. A recent analysis of fixed and variable costs per unit is as follows: Variable Costs per unit Fixed Costs per unit $ 2.61 TOTAL COST PER UNIT 3.45 Target Pricing (Costin Assume that Custom Touch currently operates in a competitive industry and prices its product using more of a Target Pricing approach. Management would like to evaluate whether the current selling price of $4.50 per unit and cost structure (shown previously) is sufficient to meet management's nevw goal of eaning a profit of $90,700. Custom Touch anticipates producing and selling 80,000 units in the upcoming period (same as previous years). Start by calculating the target full cost of the product. See completed example below: Revenue 80,000 units X 4.50 $ 360,000 Less: (90,700) 69,300 Target Full Page 4 of 6 Next, compare the current variable costs to the Target Full cost above to calculate Target Fixed Costs. See completed example below: (From above) 69.3 arget Full Less: Variable Costs 80,000 units X 2.61 (208,800) Target Fixed Cost $ 60,500 Current Fixed Costs 80,000 units X $ 0.84 67,200 Difference $ 6,700) If Custom Touch were to focus on reducing Fixed Costs, it would need to lower its Fixed Costs by the above amount to accomplish its goals. But, Custom Touch can either reduce its current Fixed OR Variable Costs to reach the Target Full Cost. If Custom were to try to reduce its Variable Costs, what would be the Target Variable Cost per Unit? Target Full Cost (from above) Less: Total Fixed Costs (from above) Target Variable Costs Divide by: Units + 80,000 units arget Variable Cost per So, if Custom Touch were to focus solely on reducing Variable Costs, it would need to reduce its Variable Cost per Unit to the number above to reach its goals. Of course, the company could also focus on cutting both costs at the same time if need be Cost-Plus Pricin If Custom Touch were able to utilize more of a Cost-Plus pricing approach, what would be the cost plus price per unit? Remember Cost Plus pricing simply adds the desired profit to the existing cost structure. See the completed example below: Current Variable Costs S 208,800 Current Fixed Costs 67,200 Full Product Cost S 276,000 Add: Desired Profit 90,700 Target Revenue S 366,700 Divide by: Units +80,000 units 4.58 ice per Unit Page 5 of 6 ix: Most company's sell more than one product or service. You must use the company's Sales Mix breakdown to determine the number of units to reach breakeven