Base Line Inc makes tennis balls The company can produce up

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?

A. ?$0.75

B. ?$0.78

C. ?$1.45

D. ?$0.71

E. ?$1.35

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 ?$79417. Assuming sales volume and other costs will not be affected by the advertising? campaign, what would Base? Line\'s cost plus price? be?

A.?$0.93

B.?$1.43

C.?$1.42

D.$1.59

E.?$1.45

Solution

Target Variable cost per unit = $352,500/450,000 units = $0.78 (option B)

Price per can = $716,917/450,000 units = $1.59 (option D)