Reference no: EM132657516

The patio sets are normally sold for $300 per set. Dial can increase capacity by 1,000 units to 3,000 units but must pay $25,000 to do so. Annual cost data for the production of 2,000 sets are classified as follows:

Question 1: Assume sales and demand for 2020 are 2,000 units, what would be the minimum price that you would charge if you wanted to make a profit. Why is this the correct price? Please explain your calculations and reference to the chart in Figure 1.

Question 2: If demand for 2020 is instead 3,000 units should the company pay to increase their capacity? Why? Explain your calculations and reference to the chart in Figure 1. Assume units are sold at the normal price. Hint: If you expand capacity, you will have to pay additional fixed costs of $25,000. Remember that fixed costs are fixed within the relevant range. If you expand capacity then you are outside this range.

IQuestion 3: If you expand capacity then you can make revenue on 1,000 additional units and would pay variable costs on 1,000 additional units. Consider the incremental profit or loss of expanding capacity. If the incremental profit of expanding capacity is positive then you should do so.

Question 4: Assume sales and demand are 1,500 units, how much will the company make on the sale of the next unit (1,501st)?

Question 5: Discuss which costs will change if the company makes and sells one more unit. Will the company make a profit on the unit if they sell at a price below your answer in 2?