Kalifo Company manufactures a line of electric garden tools that are sold in general hardware stores. The company’s controller, Sylvia Harlow, has just received the sales forecast for the coming year for Kalifo’s three products: weeders, hedge clippers, and leaf blowers. Kalifo has experienced considerable variations in sales volumes and variable costs over the past two years, and Harlow believes the forecast should be carefully evaluated from a cost-volume-profit viewpoint. The preliminary budget information for 1996 is presented below.
|Weeders||Hedge Clippers||Leaf Blowers|
|Unit Selling Price||$28.00||$36.00||$48.00|
|Variable Manufacturing Cost/Unit||13.00||12.00||25.00|
|Variable Selling Cost per unit||5.00||4.00||6.00|
For 1996, Kalifo’s fixed factory overhead is budgeted at $2 million, and the company’s fixed selling and administrative expenses are forecast to be $600,000. Kalifo has a tax rate of 40 percent.
- Determine Kalifo Co.’s budgeted net income for 1996.
- Assuming that the sales mix remains as budgeted, determine how many units of each product Kalifo must sell in order to break even in 1996.
- Determine the total dollar sales Kalifo must sell in 1996 in order to earn an after-tax net income of $450,000.
- After preparing the original estimates, Kalifo determines that its variable manufacturing cost of leaf blowers will increase 20 percent and the variable selling cost of hedge clippers can be expected to increase $1 per unit. However, Kalifo has decided not to change the selling price of either product. In addition, Kalifo learns that its leaf blower is perceived as the best value on the market, and it can expect to sell three times as many leaf blowers as any other product. Under these circumstances, determine how many units of each product Kalifo will have to sell to break even in 1996.
- Explain the limitations of cost-volume-profit analysis that Sylvia Harlow should consider when evaluating Kalifo’s 1996 budget