Question

Problem 3-38 (Part Level Submission)

Sandhill Company produces a molded briefcase that is distributed to luggage stores. The following operating data for the current year has been accumulated for planning purposes.

Sales price		$41.00
Variable cost of goods sold		13.00
Variable selling expenses		11.60
Variable administrative expenses		4.00
Annual fixed expenses
Overhead		$17,347,200
Selling expenses		3,447,200
Administrative expenses		7,228,000

Sandhill can produce 3,336,000 cases a year. The projected net income for the coming year is expected to be $4,003,200. Sandhill is subject to a 40% income tax rate.

During the planning sessions, Sandhill’s managers have been reviewing costs and expenses. They estimate that the company’s variable cost of goods sold will increase 15% in the coming year and that fixed administrative expenses will increase by $333,600. All other costs and expenses are expected to remain the same.

Sandhill Company’s managers are considering expanding the product line by introducing a leather briefcase. The new briefcase is expected to sell for $91.00; variable costs would amount to $37.00 per briefcase. If Sandhill introduces the leather briefcase, the company will incur an additional $667,200 per year in advertising costs. Sandhill’s marketing department has estimated that one new leather briefcase would be sold for every four molded briefcases.

After additional research, Sandhill’s marketing manager believes that if the price of the new leather briefcase drops to $67.00, it will be more attractive to potential customers. She also believes that at that price, the additional advertising cost could be cut to $394,982. These changes would result in sales of one molded briefcase for every three leather briefcases. Based on these circumstances, how many units of each briefcase would be required to break even in the coming year?

Answer 1