For Two Years, Richard Elkins Has Been the Manager of the Production

question 62

Essay

For two years, Richard Elkins has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose "clothes" are made of acetate, and stay on the doll with static electricity. The company's sales were mainly to large educational institutions until last year, when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders were received to keep the department at full capacity for the immediate future.
The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Mr. Elkins is considering two options to improve profitability. One would reduce variable costs to $0.75, and the other would reduce fixed costs to $35,000.
Required:
Given the fact that sales are increasing, make a short (one paragraph) recommendation to Mr. Elkins about which option he should choose. Support your recommendation with a calculation showing him how profitability will change with each option.

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Definitions:

Advertising

The activity or profession of producing advertisements for commercial products or services.

Less Elastic Demand

Demand that does not significantly change in response to a price change, indicating consumers' necessity or commitment to purchasing the product.

Markup

The difference between the cost of a good or service and its selling price, expressed as a percentage of the cost.

Advertising

The action of calling public attention to products, services, needs, etc., especially by paid announcements in print, broadcast, or online media.