Downward demand spiral. Network Company is a large manufacturer of optical storage systems based in Arizona. Its practical annual capacity is 7,500 units, and, for the past few years, its budgeted and actual sales and production volume have been 7,500 units per year. Network’s budgeted and actual variable manufacturing costs are $100 per unit, and budgeted and actual total fixed manufacturing costs are $2,250,000 per year. Network calculates full manufacturing cost per unit as the sum of the variable manufacturing cost per unit and the fixed manufacturing costs allocated to the budgeted units produced. Selling price is set at a 100% markup to full manufacturing cost per unit.

1. Compute Network’s selling price.

2. Recent competition from abroad has caused a drop in budgeted production and sales volume to 6,000 units per year, and analysts are predicting further declines. If Network continues to use budgeted production as the denominator level, calculate its new selling price.

3. Comment on the effect that changes in budgeted production have on selling price. Suggest another denominator level that Network might use for its pricing decision. Justify your choice.

4. Network has received an offer to buy identical storage units for $400 each instead of manufacturing r units in-house. Shutting down the manufacturing plant would reduce fixed costs to $450,000 per year. At what level of expected annual sales (in units) should Network accept this offer? Explain your answer.