Base Line, Inc. makes tennis balls. The company can produce up to 500,000 cans o

Question

Base Line, Inc. makes tennis balls. The company can produce up to 500,000 cans of balls per year. Current annual production is 450,000 cans. Annual fixed costs total $150,000. The variable cost of making and selling each can of balls is $0.75. Owners expect a 15% annual return on the company's $1,000,000 in assets Assume that Base Line is a price taker in a highly competitive environment. The current market price for a can of balls produced by manufacturers similar to Base Line is $1.50 If Base Line is unable to reduce its total fixed costs below $150,000, what should its target unit variable cost be? (note: it is possible for the target unit variable cost to be below the current unit variable cost) OA. $1.35 O B. $0.75 OC. $1.08 O D. $0.83 E. $1.50 Base Line has hired a marketing agency to help it gain more control over its sales price. The agency's fee for developing the advertising campaign is $79,518 Assuming sales volume and other costs will not be affected by the advertising campaign, what would Base Line's cost plus price be? A. $0.93 B. $1.59 OC. $1.43 ( D. $1.50 OE. $1.42

Explanation / Answer

Answer 1.

Sales Value = Variable cost + Fixed cost + Profit

450000*1.50 = Variable cost + 150000 + (1000000*15%)

Variable cast = 675000-300000

Variable cast = 375000

Target variable cost = 375000/450000 = $0.83 per unit

* sale price fixe because of competitive enviroment.

Answer 2.

Price per unit = 717018/450000 = $1.59 per unit

Hence Cost plus price would be $ 1.59 per unit   

Particular workings Amount Variable Cost 450000*0.75 337500 Fixed Cost 150000 Marketing agency cost 79518 Profit 1000000*15% 150000 Total sale value 717018

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