established a target profit for Digital of $210,000 for the upcoming year. Hans and Dana wanted to make sure they could meet that target.

Company Information

These "DELTA1" units consisted of a signal sender, about half the size of a pack of cards, and a receiver, which was a bit larger. A large manufacturer of motorized garage doors had agreed to take a minimum of 100,000 DELTA1 control units a year. Hans and Dana thought that 120,000 units was a reasonable target for 2017.

Digital also had designed a similar device that could be used by a household to turn on inside lights when arriving after dark. This unit, called "DELTA2," was slightly more expensive to make since the receiving part was a complete plug-in device while the DELTA1 receiver was a component of the garage door unit. Initially, Digital expected to sell the DELTA2 unit primarily through mail order catalogues. Hans and Dana projected sales of 60,000 for 2017.

The Budget

But we're budgeting a monthly profit of $20,000, so we don't have a large margin for error. Let's see what level of sales would be required to provide the parent company with its target profit of $210,000 for the year."

In preparing her analysis, she decided to assume that parts, direct labor, and supplies could be considered variable with units produced, and all the rest would be fixed within the time frame and volume range being considered.

Exhibit I

Digital Electronics

2017 Monthly Budge

Sales Revenue DELTA1 DELTA2 Total

Produce and sell per month 10,000 units 5,000 units

Projected selling price $20.00 $23.00

Sales Revenue $200,000 $115,000 $315,000

Manufacturing Cost

Parts $55,000 $32,000 $87,000

Direct Labor $35,000 $21,000 $56,000

Overhead (a) $70,000 $42,000 $112,000

Total Manufacturing Cost $160,000 $95,000 $255,000

Manufacturing Cost per Unit $16.00 $19.00

Selling and administrative ` $40,000

Total expense $295,000

Profit $20,000

(a) Manufacturing overhead:

Supplies $21,000

Occupancy (utilities, rent, maintenance). $15,000

Equipment maintenance $17,000

Equipment depreciation $8,000

Quality control and production engineering $15,000

Manufacturing administration $36,000

Total manufacturing overhead $112,000

In this budget, overhead is allocated to the two products on the basis of direct labor estimated for two products: $2.00 of overhead for each $1.00 of direct labor.

Quantitative questions that need to be addressed:

1)What would breakeven sales volume be, assuming a ratio of two DELTA1 sold for each DELTA2 sold?

2)What level of sales would provide the profit target specified by the parent company of $210,000 for the year? (Assume that they sell all that they produce).