Problem:
Foster Company manufactures a line of cookware that is sold in kitchen supply stores. The company's controller, Mary Smith, has just received the sales forecast for the coming year for Foster's three products: frying pans, Cutting Knives, and Expresso Machines. Foster has experienced considerable variations in sales volumes and variable costs over the past two years, and Smith believes the forecast should be carefully evaluated from a cost volume profit viewpoint. The preliminary budget information for 20X4 is presented below.
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Frying pans
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Cutting Knives
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Expresso Machines
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Unit sales
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50,000
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50,000
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100,000
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Unit selling price
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$ 28.00
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$ 36.00
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$ 48.00
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Variable manufacturing cost per unit
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13.00
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12.00
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25.00
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Variable selling cost per unit
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5.00
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4.00
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6.00
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For 20X4, Fosters fixed factory overhead is budgeted at $2 million, and the company's fixed selling and administrative expenses are forecast to be $600,000. Foster has a tax rate of 40 percent.
Please calculate all three products as one bundle.
Q1. Determine Foster Co.'s budgeted net income for 20X4. (I got $360,000)
Q2. Assuming that the sales mix remains as budgeted, determine how many units of each product Foster must sell in order to break even in 20X4.
Q3. Determine the total dollar sales Foster must sell in 20X4 in order to earn an after tax net income of $450,000.
Q4. After preparing the original estimates, Foster determines that its variable manufacturing cost of Expresso Machines will increase 20 percent and the variable selling cost of Cutting Knives can be expected to increase $1 per unit. However, Foster has decided not to change the selling price of either product. In addition, Foster learns that its leaf blower is perceived as the best value on the market, and it can expect to sell three times as many Expresso Machines as any other product. Under these circumstances, determine how many units of each product Foster will have to sell to break even in 20X4.
Q5. Explain the limitations of cost volume profit analysis that Mary Smith should consider when evaluating Foster's 20X4 budget.