Clifford Co. manufactures and sells adjustable windows for remodeling homes and new housing. Clifford developed its budget for the current year assuming that the windows would sell at a price of $500 each. The variable costs for each window were forecasted to be $250 and the annual fixed costs were forecasted to be $130,000. Clifford had targeted a profit of $450,000.While Clifford's sales usually increase 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 cost as planned, and it was clear that the target profit for the year would not be reached unless some actions were taken. Clifford's president assigned a management

Question

committee to analyze the situation and develop several alternative courses of action. The following three alternatives were presented to the president, only one of which can be selected.? Reduce the selling price by $50. The marketing department forecasts that with the lower price, 3,200 units could be sold during the remainder of the year. ? Lower variable costs per unit by $30 through the use of less expensive materials. Because of the difference in materials, the selling price would have to be lowered by $40 and sales of 2,600 units for the remainder of the year are forecast. ? Cut fixed costs by $15,000 and lower the selling price by 5 percent. Sales of 2,200 units would be expected for the remainder of the year. Required:a. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to break-even.b. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to attain the target profit of $450,000.c. Determine which of the alternatives Clifford's president should select to maximize profit.

What will be an ideal response?

Answer 1

a.
Unit sales to break even = Fixed costs ÷ Unit CM
= $130,000 ÷ ($500 per unit ? $250 per unit) = $130,000 ÷ $250 per unit = 520 units.

b.
Unit sales to attain target profit = (Fixed costs + Target profit) ÷ Unit CM
= ($450,000 + $130,000) ÷ $250 per unit = 2,320 units.

c.
Which alternative should be selected?
Profit = Sales ? Variable costs ? Fixed costs

Alternative 1:
Sales = ($500 per unit × 400 units) + ($450 per unit × 3,200 units) = $1,640,000.
Variable costs = ($250 per unit × 400 units) + ($250 per unit × 3,200 units) = $900,000.
Fixed costs = $130,000.
Profit = Sales ? Variable costs ? Fixed costs = $1,640,000 ? $900,000 ? $130,000
= $610,000.

Alternative 2:
Sales = ($500 per unit × 400 units) + ($460 per unit × 2,600 units) = $1,396,000.
Variable costs = ($250 per unit × 400 units) + ($220 per unit × 2,600 units) = $672,000.
Fixed costs = $130,000.
Profit = Sales ? Variable costs ? Fixed costs = $1,396,000 ? $672,000 ? $130,000
= $594,000.

Alternative 3:
Sales = ($500 per unit × 400 units) + ($475 per unit × 2,200 units) = $1,245,000.
Variable costs = ($250 per unit × 400 units) + ($250 per unit × 2,200 units) = $650,000.
Fixed costs = $115,000.
Profit = Sales ? Variable costs ? Fixed costs = $1,245,000 ? $650,000 ? $115,000
= $480,000.

Alternative 1 would yield the highest profit.