Question - All Aboard manufactures boats. Its most popular model, X, sells for $10,000. It has variable costs totaling $2,650 and fixed costs of $1,200 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.
A competitor is introducing a new boat similar to X that will sell for $3,800. Management believes it must lower the price to compete. The marketing department believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the X beds it can produce.
Required:
a. What is the annual operating income from X at the current price of $10,000?
b. What is the annual operating income from X if the price is reduced to $3,800 and sales in units increase by 25%?