-----CVP Analysis with Production and Marketing Decisions Ch. 8------
Oakley Company manufactures and sells adustable canopies that attach to motor homes and trailers. The market covers both new units as well as replacement canopies. Oakely developed its 20x2 business plan based on the assumption taht canopies would sell at a price of $400 each. The variable cost of each canopy is projected at $200, and the annnual fixed csts are budgeted at $100,000. Oakely's after-tax profit objective is $240,000; the company's tax rate is 40%. While Oakely's sales usually rise during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of the year, only 350 units had been sold at the establised price, with variable csts as planned. It was clear the 20x2 after-tax profit projection would not be reached unless some actions were taken. Oakley's president, Melanie Grand, assigned a management committee to analyze the situation and develop several alternative courses of action. The following mutually excluseive alternatives were presented to the president.
----reduce the sales price by $40. The sales organization forecasts that with the signivicantly reduced sales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted.
----Lower variable costs per unit by $25 through the use of less expensive raw materials and slightly modified manufacturing techniques. The sales price also would be reduced by$30, and sales of 2,200 units for the remainder of the year are forcast.
----Cut fixed costs by $10,000 and lower the sales price by 5%. Variable costs per unit will be unchanged. Sales of 2,000 units are expected for the remainder of the year
1.If no changes are made to the selling price or cost structure, determine the number of units that Oakley Company must sell?
a.In order to break even
b.To achieve its after-tax profit objective.
2.Determine which one of the alternatives Oakley Company should select to achieve its annual after-tax profit objective.
I am taking Managerial Accounting and using the book by R. Hilton 7th ed. I'm having a little bit of trouble with this problem. I am coming up with numbers that make sense but I want to make sure their correct.
1.a. The selling price is $400 and the variable cost is $200. The contribution margin is $200. If the fixed expenses are $100,000, the number of canopies for break even are 100000/200=500.
Canopies required to breakeven for the entire year = 500
b. The after tax profit objective is $240,000. Give as tax rate of 40%, the operating incomes comes to 240,000/(1-0.4) = 400,000. For the target operating income of $400,000, the number of canopies required to be sold are (Fixed costs + desired operating income)/unit contribution ...
Then solution explains the calculation of number of units to be sold to achieve breakeven and to achieve a given after tax profit objective