Linger Industries makes tennis balls. Linger’s only plant can produce up to 2.5 million cans of balls per year. Current production is 2 million cans. Annual manufacturing, selling, and administrative fixed costs total \($700,000\). The variable cost of making and selling each can of balls is \($1\). Stockholders expect a 12% annual return on the company’s \($3\) million of assets.

Requirements

1. What is Linger Industries’ current total cost of making and selling 2 million cans of tennis balls? What is the total cost per unit of making and selling each can of balls?

2. Assume that Linger Industries is a price-taker and the current market price is \($1.45\) per can of balls (this is the price at which manufacturers sell to retailers). What is the target total cost of producing and selling two million cans of balls? Given Linger Industries’ current total costs, will the company reach stockholders’ profit goals?

3. Continuing with Requirement 2, if Linger Industries cannot reduce its fixed costs, what is the target variable cost per can of balls?

4. Suppose Linger Industries could spend an extra \($100,000\) on advertising to differentiate its product so that it could be more of a price-setter. Assuming the original volume and costs plus the \($100,000\) of new advertising costs, what cost-plus price will Linger Industries want to charge for a can of balls?

5. Nike has just asked Linger Industries to supply 400,000 cans of balls at a special order price of \($1.20\) per can. Nike wants Linger Industries to package the balls under the Nike label (Linger will imprint the Nike logo on each ball and can). As a result, Linger Industries will have to spend \($10,000\) to change the packaging machinery. Assuming the original volume and costs, should Linger Industries accept this special order?

Assume that Linger will incur variable selling costs as well as variable manufacturing costs related to this order.