Hewtex Electronics manufactures two products—tape recorders and electronic calculators—and CHANGES USING sells them nationally to wholesalers and retailers. The Hewtex management is very pleased with BREAK-EVEN the company’s performance for the current fiscal year. Projected sales through December 31, 19X7, ANALYSIS indicate that 70,000 tape recorders and 140,000 electronic calculators will be sold this year. The TECHNIQUES projected earnings statement, which appears on page 660, shows that Hewtex will exceed its earnings goal of 9% on sales after taxes.: pg56 The tape recorder business has been fairly stable the last few years, and the company does not intend to change the tape recorder price. However, the competition among manufacturers of electronic calculators has been increasing. Hewtex’s calculators have been very popular with consumers. In order to sustain this interest in their calculators and to meet the price reductions expected from competitors, management has decided to reduce the wholesale price of its calculator from

$22.50 to $20.00 per unit effective January |, 19X8. At the same time the company plans to spend an additional $57,000 on advertising during fiscal year 19X8. As a consequence of these actions, management estimates that 80% of its total revenue will be derived from calculator sales as compared to 75% in 19X7. As in prior years, the sales mix is assumed to be the same at all volume levels.

The total fixed overhead costs will not change in 19X8, nor will the variable overhead cost rates

(applied on a direct labor hour base). However, the cost of materials and direct labor are expected to change. The cost of solid-state electronic components will be cheaper in 19X8. Hewtex estimates that material costs will drop 10% for the tape recorders and 20% for the calculators in 19X8.

However, direct labor costs for both products will increase 10% in the coming year.

Required:

a How many tape recorder and electronic calculator units did Hewtex Electronics have to sell in 19X7 to break even?

b What volume of sales is required if Hewtex Electronics is to earn a profit in 19X8 equal to 9% on sales after taxes?

c How many tape recorder and electronic calculator units will Hewtex have to sell in 19X8 to break even?

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TAPE RECORDERS ELECTRONIC CALCULATORS Total amount Per (000 omitted) unit Total amount (000 omitted) Per Total unit (000 omitted) Sales Production costs: Materials Direct labor Variable overhead Fixed overhead Total production costs Gross margin $1,050 $15.00 $3,150 $22.50 $4,200.0 $ 280 140 $ 4.00 $ 630 $ 4.50 $ 910.0 2.00 420 3.00 560.0 140 2.00 280 2.00 420.0 70 1.00 210 1.50 280.0 $ 630 $ 9.00 $1,540 $11.00 $2,170.0 $ 420 $ 6.00 $1,610 $11.50 $2,030.0 Fixed selling and administrative Net income before income taxes Income taxes (55%) Net income 1,040.0 $ 990.0 544.5 $ 445.5