Galena Company Manufactures and Sells Adjustable Canopies That Attach to Motor

Essay

Galena Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new unit purchases as well as replacement canopies. Galena developed its 2021 business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected to be $200, and the annual fixed costs were budgeted at $100,000. The goal for Galena 's after-tax operating profits was $240,000; the company's effective tax rate is 40%.
While Galena 's sales usually increase during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of 2021, only 350 units had been sold at the established price, with variable costs as planned. It was clear that the 2021 after-tax operating profit goal would not be reached unless some corrective actions were taken. Galena 's president assigned a management committee to analyze the situation and develop several alternative courses of action.
The following mutually exclusive alternatives were presented to the president:
(1) Reduce the sales price by $40. The sales department predicts that with the significantly reduced price, 2,700 units can be sold during the remainder of 2021. Total fixed and variable unit costs will stay as budgeted.
(2) Lower variable costs per unit by $25 through the use of less expensive materials and lightly modified manufacturing techniques. The sales price will also be reduced by $30. These changes can be expected to yield sales of 2,200 for the remainder of 2021.
(3) Cut fixed costs by $10,000 and lower the sales price by 5%. Variable costs per unit will be unchanged. Sales of 2,000 units can be expected for the remainder of 2021.
Required:
(a) If no changes are made to the selling price or cost structure, determine the number of units that Galena must sell in order to break even.
(b) If no changes are made to the selling price or cost structure, determine the number of units that Galena must sell in order to achieve its after-tax operating profit objective.
(c) Determine which one of the alternatives Galena should select to achieve its after-tax operating profit objective. Be sure to support your selection with appropriate computations.