RayLok Incorporated has invented a secret process to improvelight intensity and, as a result, manufactures a variety ofproducts related to this process. Each product is independent ofthe others and is treated as a separate profit/loss division.Product (division) managers have a great deal of freedom to managetheir divisions as they think best. Failure to produce targetdivisional income is dealt with severely; however, rewards forexceeding one’s profit objective are, as one division managerdescribed them, lavish.

The DimLok Division sells an add-on automotive accessory thatautomatically dims a vehicle’s headlights by sensing a certainintensity of light coming from a specific direction. DimLok has hada new manager in each of the 3 previous years because each managerfailed to reach RayLok’s target profit level. Donna Barnes has justbeen promoted to manager and is studying ways to meet the currenttarget profit for DimLok.

DimLok’s two profit targets for the coming year are $910,000(25% return on the investment in the annual fixed costs of thedivision) and $30 (pre-tax) profit for each DimLok unit sold. Otherconstraints on the division’s operations are as follows:

• Production cannot exceed sales because RayLok’s corporateadvertising program stresses completely new product models eachyear, although the models might have only cosmetic changes.
• DimLok’s selling price cannot vary above the current sellingprice of $200 per unit but may vary as much as 5% below $200.
• A division manager can elect to expand fixed production orselling facilities; however, the target profit objective related tofixed costs is increased by 25% of the cost of any such expansion.Furthermore, a manager cannot expand fixed facilities by more than35% of existing fixed cost levels without approval from the boardof directors.

Donna is now examining data gathered by her staff to determinewhether DimLok can achieve its target profits of $910,000 and $30per unit. A summary of these reports shows the following:

• Last year’s sales were 41,000 units at $200 per unit.
• DimLok’s current manufacturing facility capacity is 51,000units per year, but can be increased to 102,000 units per year withan increase of $1,110,000 in annual fixed costs.
• Present variable costs amount to $120 per unit, but DimLok’svendors are willing to offer direct materials discounts amountingto $30 per unit, beginning with unit number 71,001.
• Sales can be increased up to 122,000 units per year bycommitting large blocks of product to institutional buyers at adiscounted unit price of $170. However, this discount applies onlyto sales in excess of 51,000 units per year.

Donna believes that these projections are reliable and is nowtrying to determine what DimLok must do to meet the profitobjectives assigned by RayLok’s board of directors.

Required:

1. Determine the dollar amount of DimLok’s present annual fixedcosts per year.

2. Determine the number of units that DimLok must sell toachieve both profit objectives. Be sure to consider all constraintsin determining your answer.

3. Without regard to your answer in requirement 2, assume thatDonna decides to sell 51,000 units at $200 per unit and 79,750units at $170 per unit.

(a) Prepare a budgeted income statement (contribution format)for DimLok showing budgeted operating income.

(b) Would this projected operating income meet the stated profitobjectives?