Problem Set 1

The following are estimates relating to the 2020 budget of Thermo Blast that produces specialized ornaments for the Caribbean:

Selling Price---------------------------------$1500

Variable cost per Ornament---------------$700

Fixed annual cost----------------------------$120000

Net Profit (After tax)-----------------------$800000

Income tax rate-------------------------------25%

The mid-year review of the income statement revealed that sales were not at the expected level. For the six months of the year to June 2020, 320 units were sold at the estimated selling price with variable cost as planned. However, the net profit projection for 2020 would not be achieved unless management decisions are made. The following mutually exclusive alternatives were presented to management:

a) The selling price should be reduced by $150. This reduction in selling price will allow 1500 units to be sold for the balance of the year. The budgeted fixed cost and variable cost per unit will remain unchanged.

b) The variable cost per unit will be reduced by $50 by sourcing less expensive direct material. Also, the selling price will be reduced by $200 and the expected sales for the balance of the year is 1300 units.

c) The fixed cost would be reduced by$20000 and the selling price by 5%. Variable cost will remain unchanged and 1200 units are expected to be sold for the balance of the year.

Required:

Part A

1) Assume that no changes are made to the selling price or costs, calculate the amount of units that Thermo Blast must sell:

a. To breakeven (3 Marks)

b. To attain the estimated net profit (7 Marks)

2) Determine the alternative that Thermo Blast should select to achieve its Net profit goal. (15 Marks