Question - One product produced and sold by Big Boy Toys is an ATV gun rack for which 2014 projections are as follows:

Projected volume in units                      120,000

Sales price per unit                               $60

Variable production cost per unit            $25

Variable selling cost per unit                  $12

Fixed production cost                            $805,000

Fixed selling and administration costs     $435,000

a. Compute the projected pre-tax profit to be earned on the ATV gun rack during 2014.

b. Corporate management estimates that unit volume could be increased by 20 percent if sales price were decreased by 10 percent. How would such a change affect the profit level projected in (a)?

c. Rather than cutting the sales price, management is considering holding the sales price at the projected level and increasing advertising by $185,000. Such a change would increase volume by 20 percent. How would the level of profit under this alternative compare to the profit projected in (a)?