The Dial Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 3,000 sets per year. Annual cost data at full capacity follow:
The patio sets are normally sold for $120 per set. Dial can increase capacity by 1,000 units but must pay $25,000 to do so.
Annual cost data for the production of 3,000 sets are classified as follows:
Selling or Cost Behavior Product Cost Administrative Cost Item Variable Fixed Cost Direct Indirect $118,000 Direct labor $118
For the following questions, please use the previous information to help support your decisions. Please document your answer in a clear, concise way and reference any numbers that were used to make your decision. Each question is independent and refers to the original data unless specified otherwise. For each question, please use up to 100 words.
1) Assume demand for 2020 is 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.
2) If demand for 2020 is instead 3,500 units should the company pay to increase their capacity? Why? Please explain your calculations. Assume units are sold at the normal price.
3) Assume demand is 2,990 units for 2020. If the company receives a special order for the next 10 units at $100 per set ($1,000 in total), would you accept this order? Why? Assume there is no better offer for the last ten units.
4) Assume demand can be 4,000 units in 2020 if the company pays to increase their capacity and if the company does additional online advertising that would cost $10,000. Assume the normal selling price of $120 per set. Would you advise the company to pay to increase capacity and pay for the additional online advertising? Why? Please explain your calculations.
5) Assume demand for 2020 is 3,100 units and you have decided that it is not worth it for Dial to expand production capacity. A competitor says that her company can supply you with 100 units for $10,000 and Dial can sell these units at the normal price. Will you advise Dial to take the offer and how does this compare to your own costs of making 100 additional units (do not consider the capacity expansion costs)?