Demand Analysis

Rouse Manufacturing Limited produces and sells one product, a three-foot Canadian flag. During

20X0, the company manufactured and sold 65,000 flags at $27 each. Existing production capacity is

75,000 flags per year. In formulating the 20X1 budget, management is faced with several decisions concerning product pricing and output. The following information is available:

1. A market survey shows that the sales volume depends on the selling price. For each 51 drop in selling price, sales volume would increase by 10,000 flags. 2. The company's expected cost structure for 20X1 is as follows: a. Fixed cost (regardless of production or sales activities), $345,000

b. Variable costs per flag (including production, selling, and administrative expenses). $14 3. To increase annual capacity from the present 75.000 flags to 105,000 flags, additional investment for plant, building, equipment, and the like of $610,000 would be necessary. The estimated aver age life of the additional investment would be 10 years, so the fixed costs would increase by an average of $61,000 per year. (Expansion of less than 30.000 additional units of capacity would cost only slightly less than $610,000.)