Almo Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market includes both new unit purchasers and purchasers of replacement canopies. Almo developed its current business plan based on the assumption that canopies will sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed costs were budgeted at $100,000. Almo's after tax profit objective was $240,000; the company's effective tax rate is 40%.
Although Almo's sales usually rise during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five 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 current year after-tax profit projection would not be reached unless some actions were taken. Almo's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following mutually exclusive alternatives were presented to the president.
(a) The sale price can be reduced 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 costs will stay as budgeted.
(b) Variable costs per unit can be lowered by $25 through the use of less expensive materials and slightly modified manufacturing techniques. The sales price will also be reduced by $30, and the sales forecast is 2,200 units for the remainder of the year.
(c) Cut fixed costs by $10,000 and lower the sales price by 5%. Variable costs per unit will be unchanged. Sales of 2,000 units are expected for the remainder of the year.
Required:
(1) If no changes are made to the selling price or cost structure, what is the number of units that Almo Company must sell to achieve each of the following:
(a) The break-even point
(b) Its original after-tax profit objective of $240,000
(2) Determine which one of the three alternatives Almo Company should select. Support your selection with computations demonstrating the effect of each alternative on profit.