Armando and Alejandra Sanchez are the perfect couple. The AA Best Tennis Products makes a variety of tennis products. You have been asked to help them with the tennis balls. The only plant they have in Brazil can produce as many as 2,500,000 cans of tennis balls per year. Current production is 2,000,000 tennis cans. Annual manufacturing, selling, and administration fixed costs total $700,000. The variable cost of making and selling each can of tennis balls is $1.00. Stockholders expect a 12% annual return on the company’s $3,000,000 of assets.

Required:

1. What is AA’s current full product cost of making and selling 2,000,000 cans of tennis balls?

2. What is the current full unit product cost of each can of tennis balls?

3. Assume the current market price is $1.45 per can of tennis balls. What is the target full product costs of producing and selling 2,000,000 cans of tennis balls? Given this information will the company reach the stockholders profit goals?

4. If AA cannot change its fixed costs, what is the target variable costs per can of tennis balls?

5. Suppose AA could spend an extra $100,000 on advertising to differentiate its product so that it could be competitive. Assuming the original volume and costs plus the $100,000 of new advertising costs, what cost-plus price will AA want to charge for a can of tennis balls?

5. Reebok has just asked AA to supply the company with 400,000 cans of tennis balls for an upcoming tennis tournament at $1.20 per can. Reebok wants AA to package the tennis balls under the Reebok label. AA will have to spend $10,000 to change the packaging machinery. Assuming the original volume and costs, should AA accept this special order?

6. If AA accepts any special order at a reduced price, what are some nonfinancial issues that should be considered before the decision is made?

7. Making a sell of process further decision separate problem. ABC Consulting provides consulting services to many companies. ABC provides consulting services at an average price of $150 per hour. ABC also incurs variable costs of $75.00 per hour. For this problem, assume the fixed costs are $5,250 per month. ABC has developed new software that will revolutionize billing for companies. ABC has already invested $300,000 in the software so far. ABC can market the software as is at $40,000 per client but management only expects this to sell to 12 of their best clients. ABC management believes it can developed further by adding integration to Microsoft products at an additional development costs of $150,000. The additional development costs will allow ABC to sell it to 16 of its best clients but at a new price of $49,000. Because you are one of ABC top managers and just completed your MBA, they want your input on should the product be sold as is or developed further?

Answer rating: 100% (QA)

6 How existing customers will feel if they discover a lower price was offered to the specialorder cu... View the full answer