Problem

Mitchell Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2014 budget, Mitchell Engine Company estimates the? following:

Selling price $ 8,500
Variable cost per engine $ 5,000
Annual fixed costs $ 4,025,000
Net income $ 980,0000
Income tax rate 30%

The? first-quarter income? statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 350 units had been sold at the current price of $8,500. The income statement showed that variable and fixed costs were as planned, which meant that the 2014 annual net income projection would not met unless management took action. A management committee was formed and presented the following mutually exclusive alternative to the president.

a. Reduce the selling price by . The sales organization forecasts that at this significantly reduced price, 1,850 units can be sold during the remainder of the year. Total fixed costs and variable cost per unit will stay as budgeted.

b. Lower variable cost per unit by $675 through the use of less-expensive direct materials. The selling price will also be reduced by $750, and sales of 1,230 units are expected for the remainder of the year.

c. Reduce fixed costs by 15% and lower the selling price by 20%. Variable cost per unit will be unchanged. Sales of 1,900 units are expected for the remainder of the year.

1. If no changes are made to the selling price or cost? structure, determine the number of units that Mitchell Engine Company must sell? (a) to break even and? (b) to achieve its net income objective.

2. Determine which alternative Mitchell Engine should select to achieve its net income objective. Show your calculations.