Pricing of facial tissues (Learning Objective 3)}

Softies produces facial tissues. Softies has \(\$ 50\) million in assets. Its yearly fixed costs are \(\$ 12\) million, and the variable cost of producing and selling each box of tissues is \(\$ 0.25\). Softies currently sells 30 million boxes of tissues. Generic facial tissues such as Softies' product generally sell to retailers for \(\$ 0.75\) per box, while name brands such as Kleenex and Puffs sell to retailers for \(\$ 1.00\) per box.

\section*{Requirements}

1. Softies' stockholders expect a \(10 \%\) return on the company's assets. What is Softies' target full cost?

2. Given Softies' current costs, will its owners achieve their target profit? Show your analysis.

3. Softies has identified ways to cut its fixed costs by \(\$ 500,000\). What is its new target variable cost per unit? Will Softies be able to reach its target profit?

4. Softies started an aggressive advertising campaign to transform its product into a name brand able to compete with Kleenex and Puffs. Softies doesn't think volume will be affected, but it hopes to gain more control over pricing. If Softies spends \(\$ 3\) million a year to advertise, what will its cost-plus price be? (Continue to assume that fixed costs have declined by \(\$ 500,000\) but that Softies was unable to reduce its variable cost per unit below \(\$ 0.25\) ). Do you think Softies will be able to sell its facial tissues to retailers at the cost-plus price? Why or why not?