Hightech Electronics Company The Hightech Electronics Company produces consumer electronics products. One of its production plants produces a product at a selling price of €10 at the current quantity of 100 000 units. Variable material costs are €1.50, variable labor costs are €1.80 and variable overhead costs are €0.50 per product. Fixed manufacturing costs are €200 000 per year, and general and administrative (G&A) costs are €150 000 a year. Sales costs are composed of sales commissions (10% of sales) and annual fixed sales costs of €100 000. The corporate tax rate is 35%.

Required:

1. Prepare an Excel sheet, consisting of a Data section and a Pro Forma Income Statement section. Show in the Pro Forma Income Statement at least Gross profit, Income before taxes and Net income.

The Hightech Electronics shareholders are not satisfied with current financial performance and require at least €100 000 annual net income. The Hightech Electronics management team has developed three alternative scenarios to improve the financial performance of the company, labelled Marketing, Cost control and Quality.

The Marketing scenario is focused on additional sales based on an intensified marketing campaign. A brand new commercial will be launched (which leads to fixed sales costs of

€160 000), sales managers will be paid a higher commission of 15% of sales, both of which will lead to higher annual sales of 120 000 pieces.

The Cost control scenario is targeted at lowering the sales prices to €8 per product. This will generate sales of 140 000 products. Variable material and labour costs will both be reduced by €0.20, and G&A fixed costs will be lowered to €100 000.

The Quality scenario is designed to premium-price the product upwards to €12. Additional features and higher quality finishing require variable material and labor cost to be €2 each per product. The variable overhead costs will need to be set at €0.80 per product, because of a new quality control system. Fixed manufacturing cost will be €250 000, fixed sales cost

€110 000 and G&A costs €180 000. Sales numbers are expected to rise, despite the higher sales price, to a total number of 120 000.

2. Evaluate the financial effects of the three scenarios using Excel's What-If Analyses tool.

Try to make an informative ‘Scenario Summary.’

3. Which scenario(s) turn out to comply with Hightech Electronics' shareholder demands?