Question:
(Sales mix) One of the products produced and sold by Industrial Supply Co. is a 90-quart cold drink cooler. The company's projections for this product for 2002 follow:
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Sales price per unit
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$36
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Variable production costs
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$21
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Variable selling costs
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$4
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Fixed production costs
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$225,000
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Fixed selling & administration costs
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$75,000
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Projected volume
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90,000 units
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a. Compute the projected pretax profit to be earned on the cooler during 2002.
b. Corporate management estimates that unit volume could be increased by 20 percent if the sales price were decreased by 10 percent. How would such a change affect the profit level projected in part (a)?
c. Rather than cutting the sales price, management is considering holding the sales price at the projected level and increasing advertising by $200,000. Such a change would increase volume by 25 percent. How would the level of profit under this alternative compare to the profit projected in part (a)?