Concept explainers
CVP analysis, income taxes, sensitivity. (CMA, adapted) Thompson Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2017 budget, Thompson Engine Company estimates the following:
Selling price | $ 7,000 |
Variable cost per engine | $ 2,000 |
Annual fixed costs | $5,560,000 |
Net income | $ 900,000 |
Income tax rate | 40% |
The first-quarter income statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 300 units had been sold at the current price of $7,000. The income statement showed that variable and fixed costs were as planned, which meant that the 2017 annual net income projection would not be met unless management took action. A management committee was formed and presented the following mutually exclusive alternatives to the president:
- a. Reduce the selling price by 15%. The sales organization
forecasts that at this significantly reduced price, 1,400 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 $750 through the use of less-expensive direct materials. The selling price will also be reduced by $800, and sales of 1,130 units are expected for the remainder of the year.
- c. Reduce fixed costs by 5% and lower the selling price by 25%. Variable cost per unit will be unchanged. Sales of 1,500 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 Thompson Engine Company must sell (a) to break even and (b) to achieve its net income objective.
Required
- 2. Determine which alternative Thompson Engine Company should select to achieve its net income objective. Show your calculations.
Want to see the full answer?
Check out a sample textbook solutionChapter 3 Solutions
MyLab Accounting with Pearson eText -- Access Card -- for Horngren's Cost Accounting
- The company is formulating its plans for the coming fiscal year. Following is the data used to project the current year's after-tax net income of $110,400. Average selling price $4.00 per box Average Variable Costs: cost of candy 2.00 per box selling expenses 0.40 per box 2.40 per box Annual fixed costs: selling 160,000 administrative 280,000 440,000 Expected annual sales volume (390,000 boxes) 1,560,000 Tax Rate 40% Manufacturers of candy have announced that they will increase prices of their products an average of 15 percent in the coming year due to the increase in raw materials and labor costs. 1. What volume of sales in $ must the company achieve in the coming year to maintain the same net income after taxes as projected for the current year if the selling price of candy remains at $4 per box and the cost of candy increases 15 percent? 2. How many units would have to be sold next year to generate a net income equal 10 percent of revenue?arrow_forwardThe following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per window. Global evaluates Clear Panes based on residual income. The total investment attributed to Clear Panes is $12 million and the required rate of return on investment is 16%. Ignore taxes and depreciation expense. Answer each of the following parts independently, unless otherwise stated. Q. One of Clear Panes’s regular customers asks for a special window with stained glass inserts. The customer requires 2,500 of these windows. Clear Panes estimates its variable cost for these special units at $105 each. Clear Panes will also have to undertake new investment of $300,000 to produce these windows. What is the minimum selling price that will make the deal acceptable to Clear Panes? Also suppose that the…arrow_forwardThe following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per window. Global evaluates Clear Panes based on residual income. The total investment attributed to Clear Panes is $12 million and the required rate of return on investment is 16%. Ignore taxes and depreciation expense. Answer each of the following parts independently, unless otherwise stated. Q. What is the expected residual income in 2017?arrow_forward
- The following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per window. Global evaluates Clear Panes based on residual income. The total investment attributed to Clear Panes is $12 million and the required rate of return on investment is 16%. Ignore taxes and depreciation expense. Answer each of the following parts independently, unless otherwise stated. Q. Clear Panes receives an external special order for 10,000 units at $120 each. If the order is accepted, Clear Panes will have to incur incremental fixed costs of $250,000 and invest an additional $450,000 in various assets. What is the effect on Clear Panes’s residual income of accepting the order?arrow_forwardThe following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per window. Global evaluates Clear Panes based on residual income. The total investment attributed to Clear Panes is $12 million and the required rate of return on investment is 16%. Ignore taxes and depreciation expense. Answer each of the following parts independently, unless otherwise stated. Q. One of Clear Panes’s regular customers asks for a special window with stained glass inserts. The customer requires 2,500 of these windows. Clear Panes estimates its variable cost for these special units at $105 each. Clear Panes will also have to undertake new investment of $300,000 to produce these windows. What is the minimum selling price that will make the deal acceptable to Clear Panes? Also suppose that the…arrow_forwardThe following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per window. Global evaluates Clear Panes based on residual income. The total investment attributed to Clear Panes is $12 million and the required rate of return on investment is 16%. Ignore taxes and depreciation expense. Answer each of the following parts independently, unless otherwise stated. Q. One of Clear Panes’s regular customers asks for a special window with stained glass inserts. The customer requires 2,500 of these windows. Clear Panes estimates its variable cost for these special units at $105 each. Clear Panes will also have to undertake new investment of $300,000 to produce these windows. What is the minimum selling price that will make the deal acceptable to Clear Panes?arrow_forward
- The following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per window. Global evaluates Clear Panes based on residual income. The total investment attributed to Clear Panes is $12 million and the required rate of return on investment is 16%. Ignore taxes and depreciation expense. Answer each of the following parts independently, unless otherwise stated. Q. The window latch Clear Panes manufactures for its windows has a variable cost of $20. An outside vendor has offered to supply the 150,000 units required at a cost of $21 per unit. If the component is purchased outside, fixed costs will decline by $100,000 and assets with a book value of $150,000 will be sold at book value. Will Clear Panes decide to make or buy the component? Explain your answer.arrow_forwardCampbell 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 $100,000. Campbell’s after-tax profit objective was $243,000; 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…arrow_forwardNewton Cellular ltd. Manufactures and sells the TopLine Cell phone. For its 2021 business plan, Newton Cellular estimated the following: Selling price $750 Variable cost per cell phone $450 Annual fixed costs $180,000 Net (after-tax) income $360,000 Tax rate 25% The March financial statements reported that sales were not meeting expectations. For the first three months of the year, only 400 units had been sold at the established price. With variable costs and fixed costs staying as planned, it was clear that the 2021 after-tax profit projection would not be reached unless some action was taken. A management committee presented the following mutually exclusive alternatives to the president: Reduce the selling price by $80. The sales team forecasts that, with the significantly reduced selling price, 5,000 units can be sold during the remainder of the year. Total fixed…arrow_forward
- Thorne Co. values, advertises and sells residential property on behalf of its customers. Thecompany has been in business for only a short time and is preparing a cash budget for the first four months of 2013. Expected sales of residential properties are as follows.2012 2013 2013 2013 2013Month December January February March AprilUnits sold 10 10 15 25 30The average price of each property is £180 000 and Thorne Co. charges a fee of 3 per cent of the value of each property sold. Thorne Co. receives 1 per cent in the month of sale and the remaining 2 per cent in the month after sale. The company has nine employees who are paid on a monthly basis. The average salary per employee is£35 000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of £140 foreach additional property sold.Variable expenses are incurred at the rate of 0.5 per cent of the value of each property sold and these expenses are paid in the month of sale. Fixed…arrow_forwardawn Master Company, a manufacturer of riding lawn mowers, has a projected income for the coming year as follows: Sales $ 37,000,000 Operating expenses: Variable expenses $ 22,200,000 Fixed expenses 7,400,000 Total expenses 29,600,000 Operating profit $ 7,400,000 Required: 1. Determine the breakeven point in sales dollars. 2. Determine the required sales in dollars to earn a before-tax profit of $8,500,000. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) 3. What is the breakeven point in sales dollars if the variable expenses increases by 8%? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)arrow_forwardSitaram Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new unit purchasers as well as replacement canopies. Sitaram developed its 2019 business plan based on the assumption that canopies would sell at a price of ₹400 each. The variable costs for each canopy were projected to be ₹200, and the annual fixed costs were budgeted at ₹100,000. The goal for Sitaram's after-tax operating profits was ₹240,000; the company's effective tax rate is 40%. While Sitaram'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 2019, only 350 units had been sold at the established price, with variable costs as planned. It was clear that the 2019 after-tax operating profit goal would not be reached unless some corrective actions were taken. Sitaram's president assigned a management committee to analyse the situation and develop several…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningPrinciples of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage Learning