Columbus Canopy Company (CCC) manufactures and sells adjustable canopies that at
ID: 2486741 • Letter: C
Question
Columbus Canopy Company (CCC) manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new units as well as replacement canopies. CCC developed its 20x4 business plan based on the assumption that canopies would sell at a price of $450 each. The variable cost of each canopy is projected at $250, and the annual fixed costs are budgeted at $105,000. CCC's after-tax profit objective is $261,000; the company’s tax rate is 40 percent.
While CCC’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 400 units had been sold at the established price, with variable costs as planned. It was clear the 20x4 after-tax profit projection would not be reached unless some actions were taken. CCC’s president, Melanie Grand, 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.
Reduce the sales price by $10. The sales organization forecasts that with the significantly reduced sales price, 3,200 units can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted.
Lower variable costs per unit by $30 through the use of less expensive raw materials and slightly modified manufacturing techniques. The sales price also would be reduced by $35, and sales of 2,700 units for the remainder of the year are forecast.
Cut fixed costs by $10,500 and lower the sales price by 15 percent. Variable costs per unit will be unchanged. Sales of 2,500 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 Columbus Canopy Company must sell in an year
1a. In order to break even.
1b. To achieve its after-tax profit objective.
2. Calculate the annual after-tax profit under each alternative and select the alternative that Columbus Canopy Company should select to achieve it's annual after-tax profit objective.
2a. Alternative 1
2b. Alternative 2
2c. Alternative 3
3. Columbus Canopy should select which alternative.
Columbus Canopy Company (CCC) manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new units as well as replacement canopies. CCC developed its 20x4 business plan based on the assumption that canopies would sell at a price of $450 each. The variable cost of each canopy is projected at $250, and the annual fixed costs are budgeted at $105,000. CCC's after-tax profit objective is $261,000; the company’s tax rate is 40 percent.
While CCC’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 400 units had been sold at the established price, with variable costs as planned. It was clear the 20x4 after-tax profit projection would not be reached unless some actions were taken. CCC’s president, Melanie Grand, 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.
Explanation / Answer
Columbus Canopy Company All Amounts in $ 1. The breakeven point is a level of sales where Revenue = Costs Assuming the breakeven point in units as X 450X - 250X = $ 105,000 Thus, 200X = $ 105,000 or X = 525 units in order to breakeven Let us assume the number of units sold for achieving the given profit level as Y Now, (450X - 250X - 105,000) X 60% = $ 261,000 (Tax rate is 40%, hence net income will be 60%) Thus, 120X - 63,000 = $ 261,000 or 120X = $ 261,000 + $ 63,000 = $ 324,000 Hence, X = $ 324,000 / 120 = 2700 units for achieving the profit of $ 261,000 2. Profits calculated alternative wise a. Alternative I = Reduce sales price by $ 10 Income Statement Sales 3,200 units X $ 440 = 1408000 Variable Costs = 3,200 units X $ 250 = 800000 Contribution Margin 608000 Fixed Costs for 7 months 61250 Net Income before taxes 546750 Tax Impact @ 40% 218700 Post Tax Profit 328050 b. Alternative II = Reduce sales price by $ 35 and variable costs by $ 30 Income Statement Sales 2,700 units X $ 415 = 1120500 Variable Costs = 2,700 units X $ 220 = 594000 Contribution Margin 526500 Fixed Costs for 7 months 61250 Net Income before taxes 465250 Tax Impact @ 40% 186100 Post Tax Profit 279150 c. Alternative II = Reduce sales price by 15% and fixed costs by $ 10,500 Income Statement Sales 2,500 units X $ 382.5 = 956250 Variable Costs = 2,500 units X $ 250 = 625000 Contribution Margin 331250 Fixed Costs for 7 months 55125 Net Income before taxes 276125 Tax Impact @ 40% 110450 Post Tax Profit 165675 Since the post tax profit in alternative a is the highest amongst the three, hence Columbus should select the option of reducing the sales price without changing the cost structure.