Your company makes computer mouse pads. The mouse pads are popular gift items due to their registered use of sports team logos. The annual fixed costs of the mouse pads are \($50,000\) and the variable costs per unit are \($1.\) The company president has asked you to choose a price for the mouse pads. A careful study of the competition indicates that a price between \($3\) and \($5\) would be appropriate. The president, however, wants to use a cost-based pricing system. She suggests a price that is 100 percent greater than the average cost. You return to your office thinking that this type of pricing will be simple, but then you become confused in calculating the average cost and the corresponding price.

a. What information is missing to calculate the average cost?

b. What is the relationship between a price based on average cost and the quantity produced?

c. What is the danger of using any type of cost to determine the price?