QUESTION

SPR Sdn. Bhd manufactures and sells single product. SPR developed its 2020 business plan based on the assumption that the product would sell at a price of $300 each. The variable costs for each product were projected at $150, and the annual fixed costs were budgeted at $90,000. SPRs profit objective was $375,000.

While SPRs 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 350 units had been sold at the established price, with variable costs as planned, and it was clear that the 2020 profit projection would not be reached unless some actions were taken. SPRs president assigned a management committee to analyze the situation and develop several alternative courses of action. The following mutually exclusive alternatives, labeled A, B, and C, were presented to the president:

Alternative A: Lower the variable costs per unit by $25 through the use of less expensive materials and slightly modified manufacturing techniques. The sales price will also be reduced by $30, and sales of 2,200 units for the remainder of the year are forecast.

Alternative B: Reduce the sales price by $40. The sales organization forecasts that with the significantly reduced sales price, 3,000 units can be sold during the remainder of the year. Total

fixed and variable unit costs will stay as budgeted.

Alternative C: Cut fixed costs by $10,000, and lower the sales price by 5 percent. Variable costs per unit will be unchanged. Sales of 2,000 units are expected for the remainder of the year.

Required: (i) Determine the number of units that SPR must sell in order to break even assuming no changes are made to the selling price and cost structure.

(ii) Determine the number of units that SPR must sell in order to achieve its profit objective.

(iii) Determine which one of the alternatives SPR should select to achieve its annual profit objective. Be sure to support your selection with appropriate calculations.