Carlisle Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2014 budget, Carlisle Engine Company estimates the following:
Selling price ........... $ 4,000
Variable cost per engine ....... $ 1,000
Annual fixed costs ..........$ 4,800,000
Net income ............$ 1,200,000
Income tax rate .......... 20%
The first-quarter income statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 400 units had been sold at the current price of $ 4,000. The income statement showed that variable and fixed costs were as planned, which meant that the 2014 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, 2,100 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 $ 300 through the use of less-expensive direct materials. The selling price will also be reduced by $ 400, and sales of 1,750 units are expected for the remainder of the year.
c. Reduce fixed costs by 10% and lower the selling price by 30%. Variable cost per unit will be unchanged. Sales of 2,200 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 Carlisle Engine Company must sell
(a) To break even
(b) To achieve its net income objective.
2. Determine which alternative Carlisle Engine should select to achieve its net income objective. Show your calculations.