Question

Base​ Line, Inc. makes tennis balls. The company can produce up to​ 500,000 cans of balls per year. Current annual production is​ 450,000 cans. Annual fixed costs total​ $150,000. The variable cost of making and selling each can of balls is​ $0.75. Owners expect a​ 15% annual return on the​ company's $1,000,000 in assets.

Assume that Base Line is a price taker in a highly competitive environment. The current market price for a can of balls produced by manufacturers similar to Base Line is ​$1.45.

If Base Line is unable to reduce its total fixed costs below​ $150,000, what should its target unit variable cost​ be? (note: it is possible for the target unit variable cost to be below the current unit variable​ cost)

A. ​$0.78

B. ​$1.08

C. ​$0.71

D. ​$1.35

E. ​$1.45

Base Line has hired a marketing agency to help it gain more control over its sales price. The​ agency's fee for developing the advertising campaign is ​$78,357. Assuming sales volume and other costs will not be affected by the advertising​ campaign, what would Base​ Line's cost plus price​ be?

A. ​$1.59

B. ​$0.92

C. ​$1.45

D. ​$1.43

E. ​$1.42

Answer 1

Required return on investment = $1000000*15%
=$150000
Required contribution margin = required return+ fixed cost
=$150000+150000
=$300000
Sales revenue = 450000 cans *$1.45
=$652500
Target Variable cost = $652500-300000
=$352500
0.783333
Variable cost per unit = $352500/450000
=$0.78
Correct Option : A. ​$0.78
Total variable cost = 450000*$0.75
=$337500
Fixed cost = $150000+78357
=$228357
Required profit = $150000
Price er unit = ($337500+228357+150000)/450000
=1.59
Correct Answer = A. $1.59