Question

6. Buffalo Company manufactures and sells adjustable canopies that attach to motor homes and trailers. For its budget, Buffalo estimated the following: Selling price$420Variable cost per canopy $205Annual fixed costs $180,000Net Income$250,000Income Tax Rate30% The May financial statements reported that sales were not meeting expectations. For the first 5 months of the year, only 350 units had been sold at the established price with variable costs as planned. It was clear that the net income projection for the year would not be reached unless some actions were taken. A management committee presented the following mutually exclusive alternatives to the president: A. Reduce the selling price by $60 per unit. The sales forecast that at this significantly reduced price is which 2,850 units can be sold during the remainder of the year. Total fixed costs and variable costs per unit will stay as budgeted. B. Lower variable cost per unit by $10 using less expensive direct materials and slightly modified manufacturing techniques. The selling price will also be reduced by $30 and sales of 2,200 units are expected for the remainder of the year. C. Reduce fixed costs by $15,000 and lower the selling price by 5%. Variable costs per unit will be unchanged and sales of 2,000 units are expected for the remainder of the year. Required: (1) If no changes are made to the selling price or cost structure, determine the number of units that Buffalo must sell to break even and achieve its net income objective.(2) Determine which alternative Buffalo should select to achieve maximum net income.

Answer 1