Hewtex electronics manufactures two products, tape recorders and electronic calculators. Projected sales through December 31, 1998 suggest that 120,000 tape recorders and 190,000 electronic calculators will be sold this year. The projected earnings statement which follows shows that they will not meet its expected earnings goal of 9% of sales after taxes.

1. Assuming that the sales mix in the planning documents is achieved, how many tape recorders and electronic calculators would they need to sell in 1998 to break even?

2. What volume of sales is required if Hewtex is to earn a profit in 1999 equal to 9% of sales after taxes? They face a 42% tax rate

3. Hewtex now allocates committed costs based on flexible labor costs. A study has determined that committed costs are as follows: (1) supervisory costs for tape recorder production $500,000 (2) supervisory salaries for electronic calculator production $600,000 (3) the balance of the committed costs are proportional to the number of batches of production. Hewtex schedules tape recorders for production in batches of 1,000 and electronic calculators are made in batches of 10,000. Finally $300,000 of what was originally classified as facility sustaining cost was actually attributable to tape recorders and $400,000 was attributable to the electronic calculator line. Recast the original financial statements to correct the costing errors due to misclassification.

32 Chapter 1 Understanding Cost Behavior HEWTEX ELECTRONICS Projected Earnings Statement For the Year Ended December 31, 1998 120,000 UNITS TAPE RECORDERS 190,000 UNITs ELECTRONIC CALCULATORS TOTAL Total Amount Total amount (000 omitted) Per Unit (000 omitted) Per Unit Sales (000 omitted) Flexible costs Materials S1.800 $15.00 $4,480 $28.00 $6,280 Labor 4.00 3.00 Other 00 Committed costs 9.00 1,140 1,710 570 1,400 4,820 1.00 2.33 10.33 280 1,240 Total costs Gross margin Facility-sustaining costs Net income before income taxes 3.00 7.37 4.67 O0 25.37 2.63 1,620 2,070 690 L.680 6,060 1,060 (940) (2) What volume of sales is required if Hewtex Electronics is to earn a profit in 1999 equal to 9% of sales after taxes? Hewtex Electronics faces a tax rate of 42%. (3) Hewtex Electronics now allocates committed costs based on flexihln In study has determined that committed costs