Base Line, Inc. makes tennis balls. The company can produce up to 500,000 cans of balls per year....


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. Base Line currently operates in a highly competitive environment. The current market price for a can of balls produced by manufacturers similar to Base Line is $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 $79,496.

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. $0.93

C. $1.45

D. $1.43

E. $1.42

Cost-Plus Pricing

Cost-plus pricing is a pricing strategy where the price includes the full cost and a margin, which can be equal to a required return on assets or some other profit percentage. The full cost includes costs of direct materials, direct labor, manufacturing overhead, administrative and selling expenses, etc. This pricing strategy has to be assessed with the prices of the competitors'. Management has to evaluate the competitiveness of their products in the market as there may be alternative products that sell at a much cheaper price, which ultimately affects the sustainability of the product in the long-run.

Answer and Explanation:

Answer: Choice (a) $1.59.

The cost plus price is equal to the full cost plus the expected return. Full cost includes the fixed cost of $150,000 at...

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Learn more about this topic:

Cost Plus Pricing: Definition, Method, Formula & Examples

from Introduction to Business: Homework Help Resource

Chapter 22 / Lesson 24

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