To calculate target return price, which information is needed?

To calculate target return price, which information is needed?

• A. Fixed costs, expected unit sales, and variable costs
• B. Market share and elasticity
• C. Fixed costs only
• D. Variable costs only

Answer: (A)

Target return pricing aims to set a price that delivers a specific profit given the cost structure and expected sales volume. To do this, you need three pieces: fixed costs to know what must be covered, the variable cost per unit to know the marginal cost, and how many units you expect to sell. With these, you can determine price so that the total contribution margin covers fixed costs and achieves the desired profit. In formula form, (price − variable cost) × expected units = fixed costs + target profit. That shows why all three pieces are essential: they capture what must be earned above variable costs, and how many units will be sold to realize that earning. Market share and elasticity influence demand but aren’t the direct inputs for calculating the target return price, and having only fixed costs or only variable costs leaves out either the volume or the overall cost that must be covered. For example, if fixed costs are 10,000, variable cost per unit is 5, expected sales are 2,000, and the target profit is 20,000, then (price − 5) × 2,000 = 30,000, so price = 20.

Target return pricing aims to set a price that delivers a specific profit given the cost structure and expected sales volume. To do this, you need three pieces: fixed costs to know what must be covered, the variable cost per unit to know the marginal cost, and how many units you expect to sell. With these, you can determine price so that the total contribution margin covers fixed costs and achieves the desired profit. In formula form, (price − variable cost) × expected units = fixed costs + target profit. That shows why all three pieces are essential: they capture what must be earned above variable costs, and how many units will be sold to realize that earning. Market share and elasticity influence demand but aren’t the direct inputs for calculating the target return price, and having only fixed costs or only variable costs leaves out either the volume or the overall cost that must be covered. For example, if fixed costs are 10,000, variable cost per unit is 5, expected sales are 2,000, and the target profit is 20,000, then (price − 5) × 2,000 = 30,000, so price = 20.