Skudder Inc. sells blades that attach to garden tractors. For its 2013 budget, Skudder estimates the following:
Selling price .......... $ 750
Variable cost per engine ...... $ 350
Annual fixed costs ........ $ 750,000
Net income........... $ 150,000
Income tax rate .......... 25%
The first- quarter income statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 500 units had been sold at the current price of $ 750. The income statement showed that variable and fixed costs were as planned, which meant that the 2013 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 20%. The sales organization forecasts that at this significantly reduced price, 2,800 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 $ 15 through the use of less- expensive direct materials. The selling price will also be reduced by $ 100, and sales of 2,300 units are expected for the remainder of the year.
c. Reduce fixed costs by 20% and lower the selling price by 10%. Variable cost per unit will be unchanged. Sales of 2,100 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 Skudder must sell
(a) To break even and
(b) To achieve its net income objective.
2. Determine which alternative Skudder should select to achieve its net income objective. Show your calculations.

  • CreatedJanuary 15, 2015
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