Question 4

Idzwan Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new units as well as replacement canopies. Idzwan developed its 2021 business plan based on the assumption that canopies would sell at a price of RM570 each. The variable cost of each canopy is projected at RM370, and the annual fixed costs are budgeted at RM117,000. Idzwans after-tax profit objective is RM285,000; the companys tax rate is 40 per cent.

While Idzwans sales usually rise during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of the year, only 520 units had been sold at the established price, with variable costs as planned. It was clear the 2021 after-tax profit projection would not be reached unless some actions were taken. Idzwan Companys president assigned a management committee to analyze the situation and develop

several alternative courses of action. The following mutually exclusive 3 alternatives were presented to the president.

• Alternative 1

Reduce the sales price by RM10. The sales organization forecasts that with the significantly reduced sales price, 4,400 units can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted.

• Alternative 2

Lower variable costs per unit by RM30 through the use of less expensive raw materials and slightly modified manufacturing techniques. The sales price also would be

reduced by RM35, and sales of 3,900 units for the remainder of the year are forecast.

• Alternative 3

Cut fixed costs by RM11,700 and lower the sales price by 15 per cent. Variable costs per unit will be unchanged. Sales of 3,700 units are expected for the remainder of the

year.

Dikehendaki/Required:

1. If no changes are made to the selling price or cost structure, determine the number of units that Idzwan Company must sell to break even.

(3 markah/ marks)

2. If no changes are made to the selling price or cost structure, determine the number of units that Idzwan Company must sell to achieve its after-tax profit objective.

(7 markah/ marks)

3. ) Determine which one of the alternatives Idzwan Company should select to achieve its annua after-tax profit objective (among 3 alternatives