(Target Costing) Great Escapes Company manufactures scooters. The X14 model has total variable costs totalling $4,800 and total fixed costs of $500,000 per month based on annual production of 5,000 scooters. Great Escapes normally has 6 production runs per year, with $280,000 in set-up costs each time. The company currently has plant capacity for 10,000 scooters per year. A competitor”s scooter similar to X14 currently sells for $7,500. The marketing department at Great Escapes believes that if the company charges $7,400 there will be an annual demand of 10,000 scooters. An $8,500 price will result in an annual demand of 7,500 scooters. A price of $10,000 will result in an annual demand of 5,000 scooters.
- What is the annual operating income if the price is set at $7,400? At $8,500? At $10,000?
- If Great Escapes wants to achieve a target cost of 75% of the target price, at which price should the company set the scooter?