Question

Break-Even in Units, After-Tax Target Income, CVP Assumptions Campbell Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new unit purchases as well as replacement canopies. Campbell developed its business plan for the year based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed costs were budgeted at $120,000. Campbell's after-tax profit objective was $219,000; the company's effective tax rate is 40 percent. While Campbell'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 established price, with variable costs as planned, and it was clear that the after-tax profit projection for the year would not be reached unless some actions were taken. Campbell's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following mutually exclusive alternatives, labeled A, B, and C, were presented to the president: A. Lower the variable costs per unit by $25 through the use of less expensive materials and slightly modified manufacturing techniques. The sales price will also be reduced by $30, and sales of 2,100 units for the remainder of the year are forecast. B. Reduce the sales price by $40. The sales organization forecasts that with the significantly reduced sales price, 2,800 units can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted. C. Cut fixed costs by $10,000, and lower the sales price by 5 percent. Variable costs per unit will be unchanged. Sales of 1,900 units are expected for the remainder of the year. Required: 1. Determine the number of units that Campbell Company must sell in order to break even assuming no changes are made to the selling price and cost structure. 600 units 2. Determine the number of units that Campbell Company must sell in order to achieve its after-tax profit objective. 2,425 units 3. Determine which one of the alternatives Campbell Company should select to achieve its annual after-tax profit objective. Alternative B Be sure to support your selection with appropriate calculations. After-tax profit Alternative A $ Alternative B Alternative C 181,200

Answer 1

3 Answer - Alternative B Alternative A Alternative B Alternative C After-tax Profit $ 2,15,700 $ 2,38,800 $ 1,81,200 $ $ Particulars Sale Price Variable Cost Contribution Per Unit Number of Units sold for remainder of the Year Total Contribution Fixed Costs Net Profit Tax @ 40% Profit after Tax Profit After Tax till First 5 Months Total Profit after Tax Š Amounts Calculations 370 $400 - 30 175 $ 200 - 25 195 $370 - 175 2,100 2100 4,09,500 $195 * 2100 1,20,000 $120,000 2,89,500 $ 409,500 - 120,000 1,15,800 $289,500 * 40% 1,73,700 $ 289,500 -115,800 42,000 $ 42,000 2,15,700 $173,700 + 42,000 $ $ $ $ Particulars Sale Price Variable Cost Contribution Per Unit Number of Units sold for remainder of the Year Total Contribution Fixed Costs Net Profit Tax @ 40 % Profit after Tax Profit After Tax till First 5 Months Total Profit after Tax $ $ $ $ $ $ $ Amounts Calculations 360 $ 400 - 40 200 $ 200 160 $360 - 200 2,800 2800 4,48,000 $160 * 2800 1,20,000 120000 3,28,000 $ 448,000 - 120,000 1,31,200 $ 328,000 * 40 % 1,96,800 $ 328,000 - 131,200 42,000 $ 42,000 2,38,800 $196,800 + 42,000 $ 200 $ Particulars Sale Price Variable Cost Contribution Per Unit Number of Units sold for remainder of the Year Total Contribution Fixed Costs Net Profit Tax @ 40 % Profit after Tax Profit After Tax till First 5 Months Total Profit after Tax $ $ $ $ $ $ $ Amounts Calculations 380 $400 *0.95 $ 200 180 $ 380-200 1,900 2100 3,42,000 $180 *1900 1,10,000 $ 120,000-10000 2,32,000 $342,000 - 110,000 92,800 $232,000 * 40% 1,39,200 $232,000 - 92,800 42,000 $ 42,000 1,81,200 $139,200 + 42,000

Answer for 1 & 2 are correctly made by you. I have explained the answers for question number 3.