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 $216,000; 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 2,200 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, 2,700 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.
units

2. Determine the number of units that Campbell Company must sell in order to achieve its after-tax profit objective.
units

3. Determine which one of the alternatives Campbell Company should select to achieve its annual after-tax profit objective.

Be sure to support your selection with appropriate calculations.

	After-tax profit
Alternative A	$
Alternative B	$
Alternative C	$

Answer 1

A B C G H selling price per unit variable cost per unit contribution margin per unit $ 400 $ 200 $ 200 fixed costs contribution margin per unit break even units $ 120,000 $ 200 600 requried after tax profit requried before tax profit fixed costs required total contribution margin contribution margin per unit units to be sold to achieve after tax popfit objective $ 216,000 $360,000 $ 120,000 $ 480,000 $ 200 2,400 additional sales revenue additional variable costs additional contribution margin contribution margin earned till date total contribution margin fixed costs before tax profit income tax expense @ 40% after tax profit Alternative A Alternative B Alternative C $ 814,000 $972,000 $ 722,000 $385,000 $540,000 $ 380,000 $ 429,000 $ 432,000 $ 342,000 $ 70,000 $ 70,000 $ 70,000 $ 499,000 $ 502,000 $ 412,000 $ 120,000 $ 120,000 $ 110,000 $ 379,000 $ 382,000 $ 302,000 $ 151,600 $ 152,800 $ 120,800 $ 227,400 $ 229,200 $ 181,200

E28 X for After-tax profit ДА В с F G H Alternative A Alternative B Alternative c After-tax profit $ 227,400 $ 229,200 $ 181,200 decision - choose Alternative B reason - because it is providing highest after tax profit

for formulas and calculations, refer to the images below -

X Fax 1 F G H selling price per unit variable cost per unit contribution margin per unit 200 =E2-E3 fixed costs contribution margin per unit break even units 120000 =E4 =E6/E7 requried after tax profit 216000 requried before tax profit =E10/(100%-40%) fixed costs =E6 required total contribution margin =E11+12 contribution margin per unit =E4 units to be sold to achieve after tax popfit objective 1=E13/E14 = additional sales revenue additional variable costs additional contribution margin contribution margin earned till date total contribution margin fixed costs before tax profit come tax expense @ 40% after tax profit Alternative A =(400-30)*2200 =(200-25)*2200 =E18-E19 =200*350 =E20+E21 120000 =E22-E23 =E24*40% =E24-E25 Alternative B Alternative C =(400-40) *2700 -400*95%*1900 1=200*2700 =200*1900 =F18-F19 =G18-19 =200*350 =200*350 =F20+F21 =G20+G21 120000 110000 =F22-F23 =G22-G23 =F24*40% =G24*40% =F24-F25 =G24-G25

E28 for After-tax profit X вс А Alternative A Alternative B Alternative C After-tax profit =E26 =F26 =G26 decision - choose Alternative B reason - because it is providing highest after tax profit

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