Backpacks for Good manufactures and sells backpacks for educational and recreational uses. The company locates its manufacturing facilities in areas with high unemployment rates and provides on-site daycare and education for its employees' children. The company recently started a "one for one" program where they donate one backpack for every one sold to a local charity to provide to a child in need. The customer pays the shipping cost for items purchased, but the company pays to ship to the local charities.

Cost information is summarized below:

Variable Costs

Direct Materials................................$7.00 per unit produced

Direct Labor....................................$5.00 per unit produced

Variable Manufacturing Overhead..........$2.00 per unit produced

Shipping..........................................$2.00 per unit donated

Fixed Costs

Salaries................................................$40,000 per month

Advertising............................................$75,000 per month

Production Equipment...............................$25,000 per month

Required:

Answer each of the following independent questions.

1. Assume that the price of each backpack sold is $50.

a. How much contribution margin is earned on each backpack sold to a paying customer?

b. How much contribution margin is lost on each backpack donated to charity?

c. If one backpack is donated for each one sold, what is the weighted average contribution margin per unit produced?

d. How many total units must be produced to break-even? How many must be sold and how many donated?

2. If the company expects to sell 8,000 backpacks and donate 8,000 backpacks per month, what price must be charged to earn a target profit of $60,000 per month?

3. Assume that Backpacks for Goods' managers are trying to decide whether to set the price at $80 or $100. If the price is set at $80, they think they can sell 10,000 units (and donate 10,000 units). If the price is set at $100, they only expect to be able to sell (and donate) 8,000 units.

a. If the company's goal is to maximize economic profit, what price should they charge? Why?

b. If the company's goal is to do the most social good, what price should they charge?