BSU Window Corporation produces and sells various adjustable windows in the New
ID: 2553622 • Letter: B
Question
BSU Window Corporation produces and sells various adjustable windows in the New England area due to the extreme winters. The budget department for BSU Window has determined the selling price per window is $400. The forecasted variable costs for each window were $200 and the annual fix cost is forecasted at $100,000. BSU Window Corporation has a desire to forecast $400,000 net operating income.
The busy time of the year for BSU Window Corporation is April, May and June of each year. The financial statements for the second quarter were not meeting expectations. The company has only sold 350 units for the first five months (January to May) at the established price of $400, no change in variable costs and it was determined at this point in time that the desired target profit of $400,000 would not be reached based on the above scenario. The company realizes that it must make changes if not many employees may be laid off and this will hurt the local economy especially the Town of Bridgewater.
Management is considering proposing the following alternative:
The variable cost per unit would decrease by $25 per unit by utilizing materials which are not imported from other countries. The company will use products made in the USA as they are cheaper regardless of the quality. In addition, due to the lower quality of products, the company would decrease the current selling price by $30. The marketing department has predicted base on the changes in these variables the company will sell an additional 2,200 units for the remainder of the year. Compute Net Operating Income based off this alternative. (Hint: Do not forget about the 350 units which have already been sold before the change)
Explanation / Answer
Answer
January to May
June to December
Annual Results
Units Sold
350
Units Sold
2200
(Jan to Dec)
Per Unit ($)
Amount ($) - A
Per Unit ($)
Amount ($) - B
Amount ($) [A+B]
Sale Revenue
400
140000 [350 x 400]
370 [400 – 30]
814000 [2200 x 370]
954000
(-) variable cost
200
70000 [350 x 200]
175 [200 – 25]
385000 [2200 x 175]
455000
Contribution margin
200
$70000
195
$429000
$499,000
(-) Annual Fixed Cost
100,000
Net Operating Income (Annual)
$399,000
January to May
June to December
Annual Results
Units Sold
350
Units Sold
2200
(Jan to Dec)
Per Unit ($)
Amount ($) - A
Per Unit ($)
Amount ($) - B
Amount ($) [A+B]
Sale Revenue
400
140000 [350 x 400]
370 [400 – 30]
814000 [2200 x 370]
954000
(-) variable cost
200
70000 [350 x 200]
175 [200 – 25]
385000 [2200 x 175]
455000
Contribution margin
200
$70000
195
$429000
$499,000
(-) Annual Fixed Cost
100,000
Net Operating Income (Annual)
$399,000
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