Question

Timbuktú, Inc. manufactures and distributes widgets, with an expected price of $400 each. The variable cost for each unit was budgeted at $200, and the annual fixed costs were budgeted at $100,000. Timbuktú's after-tax (must be converted to pre-tax) profit goal was $240,000; the company's effective tax rate is 40%. For the first five months of the year sales were 350 units at a price of $400, with variable costs as planned. In order to meet expectations, the following alternatives were brought up by an external consultant:

-Reduce the sales price by $40; it is expected that reducing the price this way will result in sales of 2,700 units during the remainder of the year. Total fixed and variable costs will remain as budgeted.

-Lower variable costs per unit by $25 using less expensive raw materials. Sales price will be reduced by $30, with a forecast of 2,200 units for the remainder of the year.

-Reduce fixed costs by $10,000 and lower the sales price by 5%, with variable costs remaining unchanged. Sales of 2,000 units are expected for the remainder of the year.

Required:

A. If no changes are made to the original selling price or costs, determine the number of units that must be sold for:

a. Breaking even

b. Achieve the original after-tax profit objective.

B. Determine which of the above three alternatives will meet the annual after-tax profit objective; show your calculations.

Answer 1

Breif no changes are made the break even will be as follows

Fixed costs/ contribution ratio

100000/0.50 = 200000 ( break even in value)

200000/400 = 500 ( break even)

B. To achieve the original after tac profit objective

100000+ 400000/200 = 2500

C. The best of the all three alternative are

Particulars	alternative 1	alternative 2	alternative 3
Selling revenue	1112000	954000	900000
Variable costs	610000	446250	470000
Fixed costs	100000	100000	80000
Profit	402000	407750	350000
Alternative Which will meet	Check	check	won't meet