Problem 6 (8 points) Almo company manufactures and sells a…
Problem 6 (8 points) Almo company manufactures and sells adjustable canopies that attach to motor homes and trailers. Almo developed its budget for the current year assuming that the canopies would sell at a price of $400 each. The variable expenses for each canopy were forecasted to be $200 and the annual fixed expenses were forecasted to be $100,000. Almo had targeted a profit of $400,000. While Almo’s 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 expense as planned, and it was clear that the target profit for the year would not be reached unless some actions were taken. Almo’s president assigned a management committee to analyze the situation and develop several alternative courses of action. The following three alternatives were presented to the president, only one of which can be selected. Reduce the selling price by $40. The marketing department forecasts that with the lower price, 2,700 units could be sold during the remainder of the year. Lower variable expenses per unit by $25 through the use of less expensive materials. Because of the difference in materials, the selling price would have to be lowered by $30 and sales of 2,200 units for the remainder of the year are forecast. Cut fixed expenses by $10,000 and lower the selling price by 5 percent. Sales of 2,000 units would be expected for the remainder of the year. Required: (a) If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to break even. (1 point) (b) If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to attain the target profit of $400,000. (1 point) (c) Determine which of the alternatives Almo’s president should select to maximize profit. (6 points)
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