Thompson Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2017 budget, Thompson Engine Company estimates the following:Selling price $ 7,000 Variable cost per engine $ 2,000 Annual fixed costs $5,560,000 Net income $ 900,000 Income tax rate 40%The first-quarter income statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 300 units had been sold at the current price of $7,000. The income statement showed that variable and fixed costs were as planned, which meant that the 2017 annual net income projection would not be met unless management took action. A management committee was formed and presented the following mutually exclusive alternatives to the president: a. Reduce the selling price by 15%. The sales organization forecasts that at this significantly reduced price, 1,400 units can be sold during the remainder of the year. Total fixed costs and variable cost per unit will stay as budgeted. b. Lower variable cost per unit by $750 through the use of less-expensive direct materials. The selling price will also be reduced by $800, and sales of 1,130 units are expected for the remainder of the year. c. Reduce fixed costs by 5% and lower the selling price by 25%. Variable cost per unit will be unchanged. Sales of 1,500 units are expected for the remainder of the year. Q.Determine which alternative Thompson Engine Company should select to achieve its net income objective. Show your calculations.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Thompson Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2017 budget, Thompson Engine Company estimates the following:
Selling price $ 7,000
Variable cost per engine $ 2,000
Annual fixed costs $5,560,000
Net income $ 900,000
Income tax rate 40%
The first-quarter income statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 300 units had been sold at the current price of $7,000. The income statement showed that variable and fixed costs were as planned, which meant that the 2017 annual net income projection would not be met unless management took action. A management committee was formed and presented the following mutually exclusive alternatives to the president:
a. Reduce the selling price by 15%. The sales organization
b. Lower variable cost per unit by $750 through the use of less-expensive direct materials. The selling price will also be reduced by $800, and sales of 1,130 units are expected for the remainder of the year.
c. Reduce fixed costs by 5% and lower the selling price by 25%. Variable cost per unit will be unchanged. Sales of 1,500 units are expected for the remainder of the year.
Q.Determine which alternative Thompson Engine Company should select to achieve its net income objective. Show your calculations.
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