Reference no: EM132724419

Simnet Solutions Inc. manufactures and sells cell phones. For the 2020 business plan, the company estimated the following :

Selling Price per unit $750 Variable Cost per unit $450
Annual Fixed Cost $180,000 Net Income after tax $360,000
Tax Rate 25%

The January financial statements reported that sales were not meeting expectations. For the first 3 months of the year only 400 units had been sold at the established price. With variable cost staying as planned, it was clear that the 2020 after tax 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 forecast that with significantly reduced selling price 3,000 units can be sold in the remainder of the year. Total fixed and variable unit cost will stay as budgeted.

2. Lower variable cost per unit by $20 through the use of less expensive direct materials. The selling price will also be reduced by $40, and sales of 2,800 units are expected for the remainder of the year.

3. Cut fixed cost by $20,000 and lower the selling price by 5%. Variable cost per unit will be unchanged and sales of 2,500 units are expected for the remainder of the year.

Instructions

Problem a) Under the current production policy determine the number of units that the company must sell to:

I. break-even
II. achieve its desired operating income

Problem b) Determine which alternative the company should select to achieve its desired operating income.