Question

reak-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 $228,000; 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

1.number of units to sell to break even assuming no changes.

=>fixed costs / contribution per unit

contribution per unit = sale price per unit -variable cost per unit

=>$400-200=>$200.

=>$120,000 / (400-200)

=>600 units.

2. to acheive after tax objective:

$228,000 is after tax profit targeted,

so before tax objective = after tax profit / (1- tax rate)

=>$228,000 / (1 - 0.40)

=>$380,000

number of units to be sold = (target before tax profit + fixed costs) / contribution per unit

=>($380,000+120,000) / (400-200)

=>$500,000 / 200

=>2,500 units..

3.

	after tax profit
alternative A	227,400
alterntive B	229,200
alternative C	181,200

Alternative B should be selected to acheive after tax profit objective of $228,000.

working:

first let us know the contribution earned till now:

=>350 units *$200 =>$70,000

	alternative A	alternative B	alternative C
sales (2200*$370) (2700*$360) (1900*($400*95%))	814,000	972,000	722,000
less:variable costs(2200*175) (2700*200) (1900*200)	(385,000)	(540,000)	(380,000)
contribution	429,000	432,000	342,000
add: contribution earned till now (350 units*$200)	70,000	70,000	70,000
less: fixed costs	(120,000)	(120,000)	(110,000)
income before tax	379,000	382,000	302,000
less: tax @40%	(151,600)	(152,800)	(120,800)
after tax profit	227,400	229,200	181,200