Newton Cellular Ltd. manufactures and sells the Top-Line Cell phone. For its 2012 business plan, Newton Cellular estimated the following:
Selling price ...................................... $750
Variable cost per cell phone ................... $450
Annual fixed costs ........................ $180,000
Net (after-tax) income .................... $360,000
Tax rate 25% The March financial statements reported that sales were not meeting expectations. For the first three months of the year, only 400 units had been sold at the established price. With variable costs staying as planned, it was clear that the 2012 after-tax profit projection would not be reached unless some action was taken. A management committee presented the following mutually exclusive alternatives to the president:
1. Reduce the selling price by $60. The sales team forecasts that, with the significantly reduced selling price, 3,000 units can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted.
2. Lower variable costs per unit by $20 through the use of less expensive direct materials and slightly modified manufacturing techniques. The selling price will also be reduced by $40, and sales of 2,800 units for the remainder of the year are forecast.
3. Cut fixed costs by $20,000 and lower the selling price by 5%. Variable costs per unit will be unchanged. Sales of 2,500 units are expected for the remainder of the year.
Instructions
(a) Under the current production policy, determine the number of units that the company must sell to break even and achieve its desired operating income.
(b) Determine which alternative the company should select to achieve its desired operating income?