e) After completing Exercise 5, what is the Target Variable Cost per Unit? See circle.

Custom Touch Inc. produces high quality desk organizers. A recent analysis of fixed and variable costs per unit is as follows:

Pricing Strategy: Companies typically use one of two strategies when pricing its products Target Pricing (Costing): Used in competitive environments. This approach assumes that market forces largely set the price. So, the company must engineer their cost structure to compete Cost Plus Pricing: Assumes that the company has almost complete control of the price of the product. So, a profit is simply added to the unit cost to arrive at the price EXERCISE 5: Custom Touch Inc. produces high quality desk organizers. A recent analysis of fixed and variable costs per unit is as follow:s Variable Costs per unit Fixed Costs per unit TOTAL COST PER UNIT 2.61 0.84 $3.45 Target Pricing (Costing): 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 new goal of earning 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 80,000 units X $ 4.50360,000 (90,700) $ 269,300 Revenue Less: Desired Profit Target Full Cost Next, compare the current variable costs to the Target Full cost above to calculate Target Fixed Costs. See completed example below: Target Full Cost Less: Variable Costs Target Fixed Cost Current Fixed Costs Difference $ 269,300 (208,800) $ 60,500 67,200 $ (6,700) (From above) 80,000 units X $ 2.61- 80,000 units X $ 0.84 - 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 Unit? Cost. If Custom were to try to reduce its Variable Costs, what would be the Target Variable Cost per Target Full Cost (from above) Less: Total Fixed Costs (from above) Target Variable Costs Divide by: Units Target Variable Cost per Unit 80,000 units 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