One product produced and sold by Outback Outfitters is an ATV gun rack for which 2010 projections are as follows:
Projected volume in units ......... 120,000
Sales price per unit ............. $60
Variable production cost per unit ...... $24
Variable selling cost per unit .......... $12
Fixed production cost ........... $805,000
Fixed selling and administration costs ..... $435,000
a. Compute the projected pre-tax profit to be earned on the ATV gun rack during 2010.
b. Corporate management estimates that unit volume could be increased by 20 percent if sales price were decreased by 10 percent. How would such a change affect the profit level projected in part (a)?
c. Rather than cutting the sales price, management is considering holding the sales price at the projected level and increasing advertising by $185,000. Such a change would increase volume by 20 percent. How would the level of profit under this alternative compare to the profit projected in (a)?