Hewtex Electronics manufactures two products – tape recorders and electronic calculators  – and sells them nationally to wholesalers and retailers. The…

Hewtex Electronics manufactures two products – tape recorders and electronic calculators

– and sells them nationally to wholesalers and retailers. The Hewtex management is very

pleased with the company’s performance for the current fiscal year. Projected sales

through December 31,20×7, indicate that 70,000 tape recorders and 140,000 electronic

calculators will be sold this year. The projected earnings statement follows:

Hewtex Electronics

Projected Earnings Statement

For The Year Ended December 31, 20×7

Tape Electronic

Recorders Calculators

Total Total

Amount Per Amount Per Total

(000’s) Unit (000’s) Unit (000’s)

Sales $1,050 $15.00 $3,150 $22 50 $4,200.00

Production costs:

Direct materials 280 4.00 630 4.50 910.00

Direct labor 140 2.00 420 3.00 560.00

Variable overhead 140 2.00 280 2.00 420.00

Fixed overhead 70 1.00 210 1.50 280.00

630 9.00 1,540 11.00 2,170.00

Gross margin $ 420 $ 6.00 $1,610 $11.50 2,030.00

Fixed selling and administrative 1,040.00

Net income before income taxes 990.00

Income taxes (55 %) 544.50

Net income $ 445.50

It shows that Hewtex will exceed its earnings goal of 9% on sales after income taxes.

The tape recorder business has been fairly stable the last few years, and the company

does not intend to change the tape recorder price. Competition among manufacturers of

electronic calculators has been increasing, however. Hewtex’s calculators have been very

popular with consumers. In order to sustain this interest in their calculators and to meet

the price reductions expected from competitors, management has decided to reduce the

wholesale price of its calculator from $22.50 to $20.00 per unit effective January 1, 20×8.

At the same time, the company plans to spend an additional $57,000 on advertising

during fiscal year 20×8. As a consequence of these actions, management estimates that

80% of its total revenue will be derived from calculator sales compared to 75% in 20×7.

As in prior years, the sales mix is assumed to be the same at all volume levels.

The total fixed overhead costs will not change in 20×8, nor will the variable overhead

cost rates (applied on a direct labor hour base). However, the cost of materials and direct

labor is expected to change. The cost of solid-state electronic components will be cheaper

in 20×8. Hewtex estimates that material costs will drop 10% for the tape recorders and

20% for the calculators in 20×8. Direct labor costs for both products will increase 10% in

the coming year, however.

Required:

a. How many tape recorder and electronic calculator units did Hewtex Electronics

have to sell in 20×7 to break even?

b. What volume of sales is required if Hewtex Electronics is to earn a profit in 20×8

equal to 9% on sales after income taxes?

c. How many tape recorder and electronic calculator units will Hewtex have to sell in

20×8 to break even?