Timberland produces treated wood chips as a by-product of pulp manufacturing. The Company purchases materials (chemicals, etc.) for $32 per ton of chips. Variable costs, including labor, costs $10 per ton. The chips can be sold for $70 per ton. Fixed costs, all unavoidable, equals $84,000. Timberland's incremental tax rate is 30%.
Required:
As an alternative to advertising the factory foreman suggests that if the Company reduces the selling price to $61 per ton sales can be increased to 4,500 tons. Do you recommend the reduction in sales price?