Zimmerman Manufacturing limited produces and sells one product, a three foot Canadian flag. During 20X6 the companymanufactured and sold 50,000 flags at $26.00 each. Existing production capacity is 60,000 flags per year.
In formulating the 20X7 budget, magament isfaced with several decisions concerning product pricing andoutput. The following information is available.
1) A market survey shows that the sales volume depends on thesales price. For each $1drop in selling price, sales volume wouldincrease by 10,000 flags.
2) The companys expected cost structure for 20X7 is asfollows
a) Fixedcost (regardless of production or sales activities),$360,000
b) Variable cost(including production, selling, and administrative expenses)$15
3) To increase annual capacity form the present 60,000 to90,000 flags, additional investment for plant building and equipment and the like of $500,000 would be necessary. The estimated average life of the investment would be 10 years, so the fixed costs would increase by an average of $50,000 per year. (expansion of less than 30,000 additional units of capiticy would cost sightly less than $50,000
Indicate with reasons what the level of production and the selling price should be for the coming year. Also indicate wheterthe company should approve the plant expansion. Show calculations. Ignore income tax considerations and the time value of money.