Question

Trident Industries makes tennis balls. Its only plant can produce up to 2.5 million cans of balls per year. Current production is 2 million cans. Annual manufactureing, selling, and administrative fixed costs total $700,000. The variable cost of making and selling each can of balls is $1.00. Stockholders expect a 12% annual return on the company's $3 million of assets.

Required:

a) What is Trident's current full cost of making and selling 2 million cans of tennis balls? What is the current full unit cost of each can of tennis balls?

b) Assume Trident is a price-taker, and the current market price is $1.45 per can of balls (this is the price at which manufacturers sell to retailers). Given Trident Industries' current costs will the company reach stockholders' profit goals?

c) Suppose Trident could spend an extra $100,000 on advertising to differentiate its products so that it could be a price setter. Assuming the original volume and costs, plus the $100,000 of new advertising costs, what cost-plus price will Trident want to charge for a can of balls to realize stockholder's profit goals?

d) Sneackers has just asked Trident to supply the company with 400,000 cans of balls at a special order price of $1.20 per can. Sneackers wants Trident to package the balls under the Sneackers label (Trident will imprint the Snearckers logo on each ball and can). Trident will have to spend $10,000 to change the packaging machinery. Assuming the original volume and costs, should Trident Industries accept this special order?

Answer 1

Ans 1
Full cost of making
Annual manufactureing, selling, and administrative fixed costs	$700,000
variable cost of making and selling	2000000
(1*2000000)
Total full cost of making A	$2,700,000	ans
No. of can sold B	2000000
Full cost per can A/B	$1.35	ans
Ans b
the profit goal is	360000
3000000*12%
Current profit	200000
(1.45*2000000)2700000
No, the company would not reach the profit goal
ans c
Full cost of makig	$2,700,000
Add: desired profit	360000
Total A	$3,060,000
No. of can sold B	2000000
Price to be charged per can A/B	$1.53
ans d
Incremental revenue	80000
($1.2-variable cost $1)*400000
Less: Additional cost on packaging machinery	10000
Profit on special order	70000
as there is excess capacity hence fixed cost is
irrelevant
Yes, Trident should accept the offer