IB BUSINESS MANAGEMENT SL, Paper 2, May, 2007, TZ0, Solved Past Paper

Eye-Spy is a company that specializes in selling sunglasses designed for teenagers. These sunglasses are marketed as fashion accessories and are available in various colors and designs. They are sold through department stores. The production cost for each pair of sunglasses is $\mathrm{\$}6$, and they come with a neck chain and a protective case. The company incurs additional costs for these accessories: each chain costs $\mathrm{\$}1$, and the protective cases are purchased at a rate of $\mathrm{\$}60$ for 100 cases. Eye-Spy has annual fixed costs amounting to $\mathrm{\$}240,000$.

The sunglasses are sold to retailers in batches of 50, with each batch priced at $\mathrm{\$}600$. The distribution cost per batch is $\mathrm{\$}20$. In 2006, Eye-Spy sold 96,000 sunglasses, which was a 25% increase from the previous year, 2005. The factory is currently operating at full capacity. Due to this, the management is considering expanding production by renting a new factory unit, which would increase the annual fixed costs by $\mathrm{\$}40,000$. Additionally, wage incentives for increased production would raise manufacturing costs by $\mathrm{\$}1$ per pair of sunglasses. However, this cost increase would be passed on to the department stores by raising the batch price of 50 sunglasses to $\mathrm{\$}650$. The expansion would allow Eye-Spy to produce an additional 24,000 sunglasses per year.