Question

Taffy Co. manufactures and sells adjustable windows for remodeling homes and new housing. Taffy developed its budget for the current year assuming that the windows would sell at a price of $500 each. The variable costs for each window were forecasted to be $250 and the annual fixed costs were forecasted to be $130,000. Taffy had targeted a profit of $450,000.

While Taffy's sales usually increase during the second quarter, the May financial statements reported that sales were notmeeting expectations. For the first five months of the year, only 400 units had been sold at the established price, with variable cost as planned, and it was clear that the target profit for the year would not be reached unless some actions were taken. Taffy's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following three alternatives were presented to the president, only one of which can be selected.

1∙ Reduce the selling price by $50. The marketing department forecasts that with the lower price, 3,200 units could be sold during the remainder of the year.

2∙ Lower variable costs per unit by $30 through the use of less expensive materials. Because of the difference in materials, the selling price would have to be lowered by $40 and sales of 2,600 units for the remainder of the year are forecast.

3∙ Cut fixed costs by $15,000 and lower the selling price by 5 percent. Sales of 2,200 units would be expected for the remainder of the year.

Required:

a. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to break-even. (Write out the answer in words and then numerically)

b. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to attain the target profit of $450,000. (Write out the answer in words and then numerically)

c. Determine which of the alternatives Taffy's president should select to maximize profit.

Answer 1

A B U E IVI DATA SP 5500 VC 250 Contri 5250 FC 130000 Profit 450000 ALTERNATIVES 1 sp=5450, units=3200 2 Sp=5460, VC= 220, units=2600 3 FC= 115000, SP=5225, units=2200 Requirement 3= Analysis of alternatives 1 2 3 Units 3200 2600 2200 Sale price 5450 5460 5225 Variable Cost 250 220 250 Contribution 5200 5240 4975 Contribution($) 16640000 13624000 10945000 Less: Fixed cost -130000 -130000 -115000 Profit 16510000 13494000 10830000 As the profit is maximum in alternative 1, The manager should choose this Due to maximum profit Requirement 1 Break even point= Fixed Cost/Contribution per unit BEP (units)=130000/5250 25 units Requirement 2 Let Number of units sold=X Variable cost+Fixed Cost+Targeted Profit= Sales 250X+130000+450000= 5500X 5250X= 580000 Units= 111 111 Units