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FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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
Transcribed Image Text:John Marquez Pogi 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. John developed its 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 $250, and the annual
fixed costs were budgeted at $100,000. John's after-tax profit objective was $240,000; the
company's effective tax rate is 60%.
While John's sales usually rise during the second quarter, the May financial statements reported
that sales were not meeting expectations. For the first 5 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 would not be reached unless some actions were taken. John's president
assigned a management committee to analyze the situation and develop an alternative course of
action. The following was presented to the president.
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 and variable unit
costs will stay as budgeted.
1. Assuming no changes were made to the selling price or cost structure, how many units must John sell to break even?
2. Assuming no changes were made to the selling price or cost structure, how many units must John sell to achieve its after-tax
profit objective?
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