A company having a capacity of 1, 600 units per year currently is operating at a sales level of only 1, 200 units, with a selling price of $720 per unit. The fixed costs of the plant are $365,000 per year, and the variable costs are $416 per unit. It has been estimated that a reduction of $50 per unit in the selling price would increase sales by 300 units per year.
a. Would this be a good program to follow?
b. An alternative being considered is to engage in a modernization plan that would increase the fixed costs by $58,000 per year, but that would reduce variable costs by $56 per unit. Would this be a better procedure that the price-reduction program?