Executive officers of Freedonia Seafood Processing Company are holding a planning session for fiscal year 2019. They have already established the following standard price and costs for their canned seafood product:
Standard price and variable costs
Price per can................................................................................. $7.20
Materials cost..................................................................................2.40
Labor cost..................................................................................... 1.44
Overhead cost.................................................................................0.20
Selling, general, and administrative costs................................................. 0.50
Expected fixed costs
Production facility costs............................................................... $480,000
Selling, general, and administrative costs.............................................400,000
Required
a. Prepare the pro forma income statement that would appear in the master budget if the company expects to produce 600,000 cans of seafood in 2019.
b. A marketing consultant suggests to Freedonia's president that the product's price may affect the number of cans the company can sell. According to the consultant's analysis, if the firm sets its price at $6.70, it could sell 810,000 cans of seafood. Prepare a flexible budget based on the consultant's suggestion.
c. The same consultant also suggests that if the company raises its price to $7.70 per can, the volume of sales would decline to 400,000. Prepare a flexible budget based on this suggestion.
d. Evaluate the three possible outcomes developed in Requirements a, b, and c and recommend a pricing strategy.