Problem 2: CVP analysis (30 points total)

Rome Company manufactures three products, A, B, and C. The companys controller has just received the upcoming years sales forecast for the firms three products. Rome has experienced considerable variations in sales volumes and variable costs over the past two years, and the controller believes that the forecast should be carefully evaluated from a cost-volume-profit viewpoint. The preliminary budget information for next year follows.

A B C

Unit sales 40,000 40,000 80,000

Unit selling price $80 $110 $135

Variable product cost per unit $53 $69 $77

Variable selling cost per unit $5 $4 $6

The fixed MOH is budgeted at $3,200,000, and the companys fixed SG&A expenses are forecast to be $1,600,000. Rome has a tax rate of 40 percent.

a. Estimate Rome Companys budgeted net income for next year. (10 points)

b. Assuming that the sales mix remains as budgeted, determine how many units of each product Rome must sell to break even. (10 points)

c. After preparing the original estimates, management determined that the variable product cost of product C will increase by 20 percent and the variable selling cost of product B will increase by 40 percent. However, management has decided not to change the selling price of either product. In addition, management recently learned that the firms product C has been rated as the best value on the market, and the company now expects to sell three times as many units of product C as each of the other products. Under these circumstances, determine how many units of each product Rome must sell to break even. (10 points)