6. Buffalo Company manufactures and sellsadjustable canopies that attach to motor homes and trailers. Forits budget, Buffalo estimated the following:
Selling price $420
Variable cost per canopy $205
Annual fixed costs $180,000
Net Income $250,000
Income Tax Rate 30%
The May financial statements reported that sales were notmeeting expectations. For the first 5 months of the year, only 350units had been sold at the established price with variable costs asplanned. It was clear that the net income projection for the yearwould not be reached unless some actions were taken. A managementcommittee presented the following mutually exclusive alternativesto the president:
A. Reduce the selling price by $40 per unit. The sales forecastthat at this significantly reduced price is which 2,800 units canbe sold during the remainder of the year. Total fixed costs andvariable costs per unit will stay as budgeted.
B. Lower variable cost per unit by $10 through the use of lessexpensive direct materials and slightly modified manufacturingtechniques. The selling price will also be reduced by $30 and salesof 2,200 units are expected for the remainder of the year.
C. Reduce fixed costs by $10,000 and lower the selling price by5%. Variable costs per unit will be unchanged and sales of 2,000units are expected for the remainder of the year.
Required:
(1) If no changes are made to the selling price or coststructure, determine the number of units that Buffalo must sell tobreak even and achieve its net income objective.
(2) Determine which alternative Buffalo should select toachieve maximum net income.
