Pricing analysis HalukCraft Company sells a variety of boating and recreational acces- sories. A new product introduced last year is wooden canoe paddles which the company sells for $9 each. Production costs for the paddles are $5 of prime cost and $2 of applied overhead. About 25 percent of the overhead cost is variable. Variable selling and administrative costs associated with the paddles is $.50 per unit. During the first year, 10,000 paddles were produced and sold.

Management would like to increase its share of the canoe paddle market and are convinced that a price reduction is necessary to accomplish that. Currently the company is operating at about half of its production capacity for canoe paddles. Production facilities and equipment to produce an additional 10,000 canoe paddles a year can be leased for $12,000. Management is evaluating a price reduction of $1 per unit.

Transcribed Image Text:

REQUIRED a. At what sales volume would management be indifferent between the current selling price and the proposed selling price? b. If sales would increase to 19,000 with the proposed price reduction and sales would increase to 27,000 if the price was reduced to $7.50, what price should the company charge for canoe paddles this year?