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:
Projected Earnings Statement
For The Year Ended December 31, 20×7
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
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.
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?