on runs a year, with $ 500,000 in setup costs each time. Plant capacit y can handle up to six runs a year for a total of 30,000 beds. A competitor is introducing a new hospital bed similar to Deluxe that will sell for $ 4,000. Management believes it must lower the price to c ompete. Marketing believes that the new price will increase sales by 25 % a year. The plant manager thinks that production can increase b y 25 % with the same level of fixed costs. The company sells all the D eluxe beds it can produce. Question 1: What is the annual operating income from Deluxe at the price of $ 5,000? Question 2: What is the annual operating income from Deluxe if the price is reduced to $ 4,000 and sales in units increase by 25 %?( Points: 25) Question 1:
( TCO 7) Mercy Greeting Cards Incorporated is starting a new busine ss venture and is in the process of evaluating its product lines. Inform ation for one new product, traditional parchment grade cards, is as fo llows:
∙ For 16 times each year, a new card design will be put into produc tion. Each new design will require $ 100 in setup costs.
∙ The parchment grade card product line incurred $ 75,000 in devel opment costs and is expected to be produced over the next four years.
∙ Direct costs of producing the designs average $ 0.50 each.
∙ Indirect manufacturing costs are estimated at $ 50,000 per year.
∙ Customer service expenses average $ 0.10 per card.
∙ Current sales are expected to be 2,500 units of each card design. Each card sells for $ 3.50.
∙ Sales units equal production units each year. What is the total estimated life-cycle operating income? 4.( TCO 8) Motormart Company manufactures automobiles. The red ca r division sells its red cars for $ 25,000 each to the general public. Th e red cars have manufacturing costs of $ 12,500 each for variable and $ 5,000 each for fixed costs. The division ' s total fixed manufacturing c osts are $ 25,000,000 at the normal volume of 5,000 units.