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.
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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- The CVP income statement for Blossom Machine Company for 2021 appears below. BLOSSOMMACHINE COMPANY Income Statement For the Year Ended December 31, 2021 Sales (42,000 units) $1,050,000 Variable expenses Contribution margin Fixed expenses Net income (loss) 735,000 (a) 315,000 360,000 ($45,000) Answer the following independent questions. What was the company's break-even sales dollars in 2021? Break-even point in sales dollars $arrow_forward3-47 CVP analysis, income taxes, sensitivity. (CMA, adapted) Thompson Engine Company manufacturesand sells diesel engines for use in small farming equipment. For its 2017 budget, Thompson Engine Companyestimates the following:Selling price $ 7,000Variable cost per engine $ 2,000Annual fixed costs $5,560,000Net income $ 900,000Income 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 statementshowed that variable and fixed costs were as planned, which meant that the 2017 annual net income projectionwould not be met unless management took action. A management committee was formed and presentedthe following mutually exclusive alternatives to the president:a. Reduce the selling price by 15%. The sales organization forecasts that at this significantly reducedprice, 1,400 units can be sold during the remainder of the year. Total…arrow_forwardThompson 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…arrow_forward
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- Operating expenses includes depreciation of P40,000. For the year 2016, the company plans to increase selling price by 10% which is expected to decrease sales volume in units by 5%. The cost of sales as a percent of sales will increase to 62%. Other than depreciation, all operating costs are variable. Required: What is the budgeted income for 2016?arrow_forwardRowe Tool and Die (RTD) produces metal fittings as a supplier to various manufacturing firms in the area. The following is the forecasted income statement for the next quarter, which is the typical planning horizon used at RTD. RTD expects to sell 55,000 units during the quarter. RTD carries no inventories. Sales revenue Costs of fitting produced Gross profit Administrative costs Operating profit Required A Fixed costs included in this income statement are $357,500 for depreciation on plant and machinery and miscellaneous factory operations and $99,500 for administrative costs. RTD has received a request for 10,000 fittings to be produced in the next quarter from Endicott Manufacturing. Endicott has never purchased from RTD, although they have been a local company for many years. Endicott has offered to pay $21.00 per unit. RTD can easily produce the 10,000 units with its existing capacity. Production of the 10,000 units will incur all variable manufacturing costs but no fixed…arrow_forwardRowe Tool and Die (RTD) produces metal fittings as a supplier to various manufacturing firms in the area. The following is the forecasted income statement for the next quarter, which is the typical planning horizon used at RTD. RTD expects to sell 61,000 units during the quarter. RTD carries no inventories. Sales revenue Costs of fitting produced Gross profit Administrative costs Operating profit Required A Fixed costs included in this income statement are $396,500 for depreciation on plant and machinery and miscellaneous factory operations and $102,500 for administrative costs. RTD has received a request for 10,000 fittings to be produced in the next quarter from Endicott Manufacturing. Endicott has never purchased from RTD, although they have been a local company for many years. Endicott has offered to pay $21.60 per unit. RTD can easily produce the 10,000 units with its existing capacity. Production of the 10,000 units will incur all variable manufacturing costs but no fixed…arrow_forward
- Principles of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage Learning