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 $231,000; 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. Alternative B

Be sure to support your selection with appropriate calculations.

_____________________After-tax profit

Alternative A ___________$___________

Alternative B ___________$____________

Alternative C___________ $_____________

Answer 1

1	selling price	400
	less:variable cost	-200
	contribution margin per unit	200
	fixed cost given	120000
	Beak even point in units = fixed cost/contribution margin per unit
		=120000/200
		=600 units
2	After tax profit objective = $231,000
	tax rate = 40%
	therefore before tax profit objective = $231,000/40% =$577,500
	units to sell in order to achieve after tax profit objective = (fixed cost+profit)/contribution margin per unit
3	particulars	ALTERNATIVE B	ALTERNATIVE B	ALTERNATIVE C
	SALES	(350*400)+(2200*370) = 954000	(350*400)+(2700*360) = 1112000	(350*400)+(1900*400*95%) = 862000
	Less: variable cost	(350*200)+(2200*175) = 455000	(350*200)+(2700*200) = 610000	(350*200)+(1900*200) = 450000
	conteibution margin	499000	502000	412000
	less:fixed cost	120000	120000	110000
	profit before tax	379000	382000	302000
	less tax@40%	151600	152800	120800
	profit after tax	227400	229200	181200
	the company should select Alternative B to achieve after tax profit