Following are the unit costs of making and selling a single product at a normal level of 5,000 units per month and a current unit selling price of $90:

Consider each requirement separately. Label all computations, and present
your solutions in a form that will be comprehensible to the company
president.
1. This product is usually sold at a rate of 60,000 units per year. It is predicted
that a rise in price to $98 will decrease volume by 10 percent.
How much may advertising be increased under this plan without having
annual operating income fall below the current level?
2. The company has received a proposal from an outside supplier to
make and ship this item directly to the company’s customers as sales
orders are forwarded. Variable selling and administrative costs would
fall 40 percent. If the supplier’s proposal is accepted, the company
will use its own plant to produce a new product. The new product
would be sold through the manufacturer’s agents at a 10 percent
commission based on a selling price of $40 each. The cost characteristics
per unit of this product, based on predicted yearly normal volume,
are as follows:

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Manufacturing costs: Direct materials Direct labour Variable overhead Fixed overhead (total for the year, $300,000) Selling and administrative expenses: Variable Fixed (total for the year, $480,000) $35 12 8 5 15 8