Bright Colors Inc. produces and sells printer colors in 200 ml bottles for Deskjet Ink-tank printers. During 2020, the company produced and sold 130,000 bottles at an average price of $25 per bottle. At the existing capacity the company can produce 150,000 bottles per year. 

While preparing the budget for 2021, the management of the company has to make several decisions on the product pricing as well as output.

1. A recent market survey has revealed that the demand of the product varies inversely with its price with an absolute price elasticity of 3.33 approximately (i.e., for each $1 price drop there will be an increase in demand by 20,000 bottles). 

2. The company’s expected cost structure for 2021 is as follows: 

a. Fixed costs (regardless of production and sales) $250,000.

b. Variable cost of goods sold per bottle $12.00. 

3. In the event of an increase in demand, the company can increase the installed capacity from 150,000 bottles per year to 210,000 bottles per year at an additional capital investment of $1,250,000. The estimated average life of the additional investment would be 10 years without any salvage value at the end. This results into an increase in annual fixed costs by $125,000. (Expansion of less than 60,000 additional bottles would cost only slightly lower than $1,250,000.)