Hewtex Electronics manufactures two products – tape recorders and electronic calculatorsĀ  – and sells them nationally to wholesalers and retailers. The…

Hewtex Electronics manufactures two products – tape recorders and electronic calculators 

– and sells them nationally to wholesalers and retailers. The Hewtex management is very 

pleased with the company’s performance for the current fiscal year. Projected sales 

through December 31,20×7, indicate that 70,000 tape recorders and 140,000 electronic 

calculators will be sold this year. The projected earnings statement follows: 

Hewtex Electronics 

Projected Earnings Statement 

For The Year Ended December 31, 20×7 

 Tape Electronic 

 Recorders Calculators 

 Total Total 

 Amount Per Amount Per Total 

 (000’s) Unit (000’s) Unit (000’s) 

 Sales $1,050 $15.00 $3,150 $22 50 $4,200.00

 Production costs: 

 Direct materials 280 4.00 630 4.50 910.00 

 Direct labor 140 2.00 420 3.00 560.00 

 Variable overhead 140 2.00 280 2.00 420.00 

 Fixed overhead 70 1.00 210 1.50 280.00

 630 9.00 1,540 11.00 2,170.00

 Gross margin $ 420 $ 6.00 $1,610 $11.50 2,030.00 

 Fixed selling and administrative 1,040.00

 Net income before income taxes 990.00 

 Income taxes (55 %) 544.50

 Net income $ 445.50

It shows that Hewtex will exceed its earnings goal of 9% on sales after income taxes. 

The tape recorder business has been fairly stable the last few years, and the company 

does not intend to change the tape recorder price. Competition among manufacturers of 

electronic calculators has been increasing, however. Hewtex’s calculators have been very 

popular with consumers. In order to sustain this interest in their calculators and to meet 

the price reductions expected from competitors, management has decided to reduce the 

wholesale price of its calculator from $22.50 to $20.00 per unit effective January 1, 20×8. 

At the same time, the company plans to spend an additional $57,000 on advertising 

during fiscal year 20×8. As a consequence of these actions, management estimates that 

80% of its total revenue will be derived from calculator sales compared to 75% in 20×7. 

As in prior years, the sales mix is assumed to be the same at all volume levels. 

The total fixed overhead costs will not change in 20×8, nor will the variable overhead 

cost rates (applied on a direct labor hour base). However, the cost of materials and direct 

labor is expected to change. The cost of solid-state electronic components will be cheaper 

in 20×8. Hewtex estimates that material costs will drop 10% for the tape recorders and 

20% for the calculators in 20×8. Direct labor costs for both products will increase 10% in 

the coming year, however. 

Required: 

a. How many tape recorder and electronic calculator units did Hewtex Electronics 

have to sell in 20×7 to break even? 

b. What volume of sales is required if Hewtex Electronics is to earn a profit in 20×8 

 equal to 9% on sales after income taxes? 

c. How many tape recorder and electronic calculator units will Hewtex have to sell in 

 20×8 to break even?

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