Rouse Manufacturing Limited produces and sells one product, a three-foot Canadian flag. During 20X0, the company manufactured and sold 65,000 flags at $27 each. Existing production capacity is 75,000 flags per year.
In formulating the 20X1 budget, management is faced with several decisions concerning product pricing and output. The following information is available:
1. A market survey shows that the sales volume depends on the selling price. For each $1 drop in selling price, sales volume would increase by 10,000 flags.
2. The company’s expected cost structure for 20X1 is as follows:
a. Fixed cost (regardless of production or sales activities), $345,000
b. Variable costs per flag (including production, selling, and administrative expenses), $14
3. To increase annual capacity from the present 75,000 flags to 105,000 flags, additional investment for plant, building, equipment, and the like of $610,000 would be necessary. The estimated average life of the additional investment would be 10 years, so the fixed costs would increase by an average of $61,000 per year. (Expansion of less than 30,000 additional units of capacity would cost only slightly less than $610,000.)
Indicate, with reasons, what the level of production and the selling price should be for the coming year. Also indicate whether the company should approve the plant expansion. Show your calculations.
Ignore income tax considerations and the time value of money.

  • CreatedNovember 19, 2014
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