Pringle Paper Products is considering converting some of its fine writing paper into fancy stationery. The company currently is able to sell all of the fine writing paper it can produce, but it believes that its profit might be improved by giving up some of its fine writing paper sales to produce higher-priced stationery. Although the plant would not have to be expanded for this new processing, new printing equipment would have to be leased for a cost of $14,000 per year. In addition, packaging equipment currently in fulltime use in other production would be reassigned to this new processing, thus slightly reducing production capability for another product. The lost sales for this other product would result in opportunity costs of $.025 per box of stationery packaged. Costs of converting the fine writing paper into fancy stationery include direct labor and overhead costs totaling $0.40 per box of stationery. Increased delivery costs and the cost of fancy display cartons are expected to cause variable selling costs to be higher for fancy stationery than for writing paper. The company believes that customer demand will be 40,000 boxes of stationery per year for an indefinite number of years. Pringle estimates that if it does not convert some of its writing paper into fancy stationery, it will earn

$50,000 revenue and incur $2,000 in variable selling costs on that writing paper. It also estimates that if it does convert this writing paper into stationery, it will earn $140,000 revenue and incur $5,000 in variable selling costs for the stationery.

Required: (1) Prepare an analysis showing the relevant costs and revenues of each alternative, and decide which alternative should be chosen based on this analysis.

(2) Do you think your decision might change if you knew the manufacturing costs required to produce the fine writing paper? Why or why not?

(3) What if customer demand turns out to be less than 40,000 boxes of stationery per year? At a minimum, how many boxes of stationery must Pringle sell to justify your decision in (1)? TYK-1