Reference no: EM132540605

Nestle

Manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new units as well as replacement canopies. Firm developed its 2004 business plan based on the assumption that canopies would sell at a price of Rs.1000 each. The variable cost of each canopy is projected at Rs.400, and the annual fixed costs are budgeted at Rs.200, 000.Firm's after-tax profit objective is Rs.500, 000; the company's tax rate is 30 percent. While firm'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. It was clear the 2004 after-tax profit projection would not be reached unless some actions were taken. Firm's president, assigned a management committee to analyse the situation and develop several alternative courses of action.

The following mutually exclusive alternatives were presented to the president.

• Reduce the sales price by Rs.80. The sales organization forecasts that with the significantly reducedsales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unitcosts will stay as budgeted.
• Lower variable costs per unit by Rs.50 through the use of less expensive raw materials and slightly modified manufacturing techniques. The sales price would also be reduced by Rs.60, and sales of 2,200 units for the remainder of the year are forecast.
• Cut fixed costs by Rs.20, 000 and lower the sales price by 5 percent. Variable costs per unit will beunchanged. Sales of 2,000 units are expected for the remainder of the year.

Required:

Question 1. If no changes are made to the selling price or cost structure, determine the number of units that Company must sell:

a. In order to break even.

b. To achieve its after-tax profit objective.

Question 2. Determine which one of the alternatives management should select to achieve its annual After-tax profit objective.