HEWTEX ELECTRONICS

Hewtex Electronics manufactures two new products, MP3 players

and electronic calculators, and sells them nationally to wholesalers and

retailers. The Hewtex management is very pleased with the companys

performance for the current fiscal year. Projected sales through

December 31, 2012 indicate that 70,000 MP3 players and 140,000

electronic will be sold this year. The projected earnings statement, which

appears below, shows that Hewtex will exceed its earnings goal of 9

percent on sales after taxes.

The MP3 player business has been fairly stable for the last few

years, and the company does not intend to change the MP3 player price.

However, the competition among manufacturers of electronic calculators

has been increasing. Hewtexs 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 1, 2013. At the same time the company

plans to spend an additional $57,000 on advertising during the fiscal year

2013. As a consequence of these actions, management estimates that 80

percent of its total revenue will be derived from calculator sales as

compared to 75 percent in 2012. 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 2013, nor will the

variable overhead cost rates (applied on a direct labor hour base).

However, the cost of materials and direct labor is expected to change.

The cost of solid state electronic components will be cheaper in 2013.

Hewtex estimates that material costs will drop 10 percent for the MP3

players and 20 percent for the calculators in 2013. However, direct labor

costs for both products will increase 10 percent in the coming year.

Required:

1. How many MP3 players and electronic calculator units did Hewtex

Electronics have to sell in 2012 to break even?

2. What volume of sales is required if Hewtex Electronics is to earn a

profit in 2013 equal to 9 percent on sales after taxes.

3. Derive the equation describing the level of profits in 2013 as a

function of the number of MP3 players and electronic calculators

sold. Plot the breakeven line and the line representing a profit of 9

percent of sales after taxes.

Projected Earnings Statement

For the Year Ended December 31, 2012

MP3 players Electronic Calculators Total

Total amt Total amt

(000 omitted) (000 omitted)

Per unit Per unit (000 omitted)

Sales $1,050 $15.00 $3,150 $22.50 $4,200.0

Production costs:

Materials 280 4.00 630 4.50 910.0

Direct labor 140 2.00 420 3.00 560.0

Var. Overhead 140 2.00 280 2.00 420.0

Fixed Overhead 70 1.00 210 1.50 280.0

Total production

Costs $ 630 $ 9.00 $1,540 $ 11.00 $2,170.0

Gross margin $ 420 $ 6.00 $1,610 $ 11.50 $2,030.0

Fixed selling and

Administrative 1,040.0

Net income before

Income taxes 990.0

Income taxes (55%) 544.5

Net Income $445.5

HEWTEX ELECTRONICS Projected Earnings Statement For the Year Ended December 31, 2012 Electronic Calculators Total MP3 players Total amt (000 omitted) Total amt (000 omitted) Per unit Per unit (000 omitted) Sales Production costs: $1050 $15.00 $3,150 $22.50 $4,200.0 280 140 Var. Overhead140 Fixed Overhead 70 4.00 2.00 2.00 1.00 630 420 280 210 4.50 3.00 2.00 1.50 910.0 560.0 420.0 280.0 Materials Direct labor Total production Gross margin S 420 Administrative Income taxes $ 9.00 S 6.00 $1,540 $1.610 $ 11.00 $ 11.50 $2,170.0 $2,030.0 Costs S 630 Fixed selling and 1,040.0 Net income before 990.0 544.5 $445 5 Income taxes (55%) Net Income