Question:
Mountain Top Boot Company plans to expand its manufacturing capacity to allow up to 20,000 pairs of a new product each year. Because only one product will be produced, management is deciding between the production of the Sure Foot for backpacking and the Trail Runner for exercising. A marketing analysis shows mountain top could sell between 8,000 and 14,000 pairs of either product. The accounting department has developed the subsequent price and cost information:
selling price per pair..............sure foot=$80.00 trail runner=$75.00
variable costs per pair...........sure foot=$50.00 trail runner=$50.00
product costs..........................sure foot=$130,000.00 trail runner=$50,000.00
Facility costs for expansion, regardless of product, are $150,000. Mountain Top is subject to a 40 percent income tax rate.
a. Evaluate the number of pairs of Sure Foot boots Mountain Top must sell to get an after tax profit of $30,000.
b. Evaluate the number of pairs of each product Mountain Top must sell to get identical before tax profit.
c. for the solution to requirement b, determine Mountain Top's after-tax profit or loss.
d. Which product should Mountain Top produce if both products were guaranteed to sell at least 13,000 pairs. Verify your solution with calculations.
e. how much could the variable costs per pair of the product NOT selected in requirement d have to fall before both products give the same profit at sales of 13,000 pairs?