Emerson Ventures is considering producing a new line of hang gliders. The compan

Question

Emerson Ventures is considering producing a new line of hang gliders. The company estimates that variable costs will be $400 per unit and fixed costs will be $352,000 per year.
Emerson Ventures is considering producing a new line of hang gliders. The company estimates that variable costs will be $400 per unit and fixed costs will be $352,000 per year.
Emerson has a pricing policy that dictates that a product Emerson has a pricing policy that dictates that a product

Emerson Ventures is considering producing a new line of hang gliders. The company estimates that variable costs will be $400 per unit and fixed costs will be $352,000 per year. Emerson has a pricing policy that dictates that a product's price must be equal to full cost plus 50 percent. To calculate full cost, Emerson must estimate the number of units it will produce and sell in a year. At the beginning of the year, Emerson estimates that it will sell 1,600 gliders and sets its price according to that sales and production volume. What is the price? Right after the beginning of the year, the economy takes a dive and Emerson finds that demand for their gliders has fallen drastically. Emerson revises its sales and production estimate to just 1,000 gliders for the year. According to company policy, what price must now be set? What is likely to happen to the number of gliders sold if Emerson follows company policy and raises the glider price to that calculated in part b?

Explanation / Answer

1) fixed costs = 400/unit variable costs = 352000/year

expected production = 1600

so fixed cost per unit comes down to = 352000/1600= 220

so total cost per unit = 620

as per company policies selling price = cost + 0.5 *cost = 1.5*cost = 930

2)fixed costs = 400/unit variable costs = 352000/year

expected production = 1000

so fixed cost per unit comes down to = 352000/1000= 352

so total cost per unit = 752

as per company policies selling price = cost + 0.5 *cost = 1.5*cost = 1128

3)it is likely to fall....as price rises...demand may come down due to high costs... there must be an optimal trade-off

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