The Martell Company has recently established operations in a competitive market. Management has been aggressive in its attempt to establish market share. The price of the product was set at $5 per unit, well below that of the company’s major competitors. Variable costs were $4.50 per unit, and total fixed costs were $600,000 during the first year.

REQUIRED

A. Assume that the fi rm was able to sell 1 million units in the first year. What was the pretax earning (loss) for the year?
B. Assume that the variable cost per unit and total fixed costs do not increase in the second year. Management has been successful in establishing its position in the market. What price must be set to achieve pretax earnings of $25,000? Assume that sales remain at 1 million units.