Problem 2

Pride Athletics Wear, Inc. produces and sells two styles of athletic wear, Fancy Brand and Econo Brand. Fancy Brand appeals to customers preferring a luxury product while Econo brand appeals to the cost-conscious customer.

In its current expansion plans, the company intends to increase manufacturing capacity allowing it to produce up to 30,000 additional units of athletic wear each year. In conjunction with that plan, the company decided that their increased production will involve either Fancy Brand or the Econo Brand, not both. So, they must decide which brand they will produce with their expanded capacity.

Related to the proposed expansion, marketing analysis indicates that, under forecasted conditions, the company will sell 15,000 25,000 additional units, provided they focus on one brand, not both.

Below is the selling price and cost information for the companys brands, before expansion:

	Fancy Brand	Econo Brand
Selling price	$150	$80
Variable production costs	$80	$40
Other variable costs	$20	$10
Fixed costs allocation % (before expansion)	75%	25%

Before expansion, Pride Athletics total fixed costs are $425,000. The accounting department estimates that the expansion will increase fixed costs by $50,000, which will be assigned to the brand chosen for production.

Required

1. Determine the total number of units Pride Athletics must sell, before expansion, to generate:

   1. $30,000 of operating profit for Fancy Brand

   2. $30,000 of operating profit for Econo Brand

2. Again, before considering the implications of expansion, compute the number units of sales at which the two brands generate equal operating profit.

   1. How much is the operating profit amount for each brand?

3. Given the information provided about costs before expansion and the additional cost of expansion, and assuming the company sells 15,000 units of the chosen brand, which brand should Pride Athletics chose for the expansion, Fancy Brand or Econo Brand? Please support your answer with calculations.

4. Management asks whether there is a general rule concerning selecting the brand for expansion, given that such expansion will change fixed costs, but not variable costs. Given your observations in A-C above, can you offer such advice? (No computation required).