Patterson Paints makes and sells paint to home improvement stores. Patterson’s only plant can produce up to 13 million cans of paint per year. Current annual production is 10 million cans. Fixed manufacturing, selling, and administrative costs total $20 million per year. The variable cost of making and selling each can of paint is $5.50. Stockholders expect a 20% annual return on the company’s $42 million of assets.

Requirements

1. What is Patterson’s current total cost of making and selling 10 million cans of paint? What is the current cost per can of paint?

2. Assume that Patterson is a price-taker and that the current wholesale market price is $8.00 per can of paint. What is the target total of cost in producing and selling 10 million cans of paint? Given Patterson’s current total costs, will the company reach stockholders’ profit goals?

3. Continuing with Requirement 2, let’s say that Patterson has found ways to reduce its total fixed costs by $500,000. What is the target variable cost per can of paint?

4. Suppose Patterson plans to spend an additional $4.5 million on advertising to differentiate its product in order to increase sales volume to 12 million cans and become more of a price-setter. Assume that Patterson did reduce its total fixed costs by $500,000 as stated in Requirement 3 but could not find ways to save on its variable costs. What is the cost-plus price for a can of paint under these conditions?



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