Question No.1 -
Mac Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market for canopies includes both new unit purchases as well as replacement canopies. Mac developed its fiscal year 2011 business plan 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 $100,000. Mac's after-tax profit objective for the entire year was $240,000; the company's effective tax rate is 40 percent.
While Mac's sales usually rise during the second quarter, the May 2011 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 2011 after-tax profit projection would not be reached unless some actions were taken. Mac's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following three mutually exclusive alternatives were presented to the president:
Alternative 1:
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 costs and variable unit costs will stay as budgeted.
Alternative 2:
Lower variable costs per unit by $25 through the use of less expensive raw 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.
Alternative 3:
Cut fixed costs by $10,000 and lower the sales price by 5 percent. Variable costs per unit will be unchanged. Sales of 2,000 units are expected for the remainder of the year.
Required:
A) Using the business plan numbers, determine the number of units that Mac Company must sell in 2011 :
i. In order to break even.
ii. To achieve its after-tax profit objective.
B) Determine which one of the alternatives Mac Company should select to achieve its annual after-tax profit objective. Be sure to support your selection with appropriate calculations.