Pegasus Shoe Company plans to expand its manufacturing capacity to allow up to 2
ID: 2568364 • Letter: P
Question
Pegasus Shoe Company plans to expand its manufacturing capacity to allow up to 20,000 pairs of a new product each year. Because only one product can be produced, management is deciding between the production of the Roadrunner for backpacking and the Trail Runner for excercising. A marketing analysis indicates Pegasus could sell between 8,000 and 14,000 pairs of either product.
The accounting department has developed the following price and cost information.
Roadrunner ||||| Trail Runner
Selling Price per pair ---> $90 ||||| $75
Variable Cost per Pair ---> 60 ||||| 50
Product Costs ----> $130,000 ||||| $50,000
Facility costs for expansion, regardless of produc, are $150,000. Pegasus is subject to a 40 percent income tax rate.
a) Determine the number of pairs of Roadrunner shoes Pegasus must sell to obtain an after-tax profit of $30,000.
b) Determine the number of pairs of EACH product Pegasus must sell to obtain identical before-tax profit.
c) For the solution to requirement b, calculate Pegasus' after-tax profit or loss.
d) Which product should Pegasus produce if both products were guaranteed to sell at least 13,000 pairs? Verify solution with calculations.
Explanation / Answer
Answer a: After tax profit needs to be $30000
Production roadrunner:
Before tax profit(PBT) = PBT*(1- tax rate) =30000, PBT = 30000/(1-0.4) = 30000/0.6 = $50000
revenue - total production cost - total variable cost = $50000
(sales price* no of units sold) -($130000) - (60*no of units sold) =50000
lets assume units sold are x
90*x -130000-60*x = 50000
30*x= 50000+130000
x= 180000/30 = 6000 units need to be sold
Assumption taken that we are not taking costs involved in facility expansion. calculating no of units sold in isolation.
if facility expansion cost also taken in to consideration in calculation then subtract $150000 also
new equation will become
90*x - 130000- 60*x - 150000 = 50000
Answer B. similarly,
here PBT is given 30000
for roadrunner
90*x -130000-60*x = 30000
30*x = 160000
x= 5333.3, approx 5334
for trailrunner
75*x - 50*x -50000= 30000
25*x = 80000
x = 80000/25
x= 3200
no of units to be sold for trail runner = 3200
Answer C. After tax profit for both the case would be
30000*(1-0.4) = 18000 profit
Answer D. As Facility costs for expansion is same for both the products. it wont make any difference in selection of the product
We will have to calculte net profit on the sale of 13000 units( least no of units sold)
Using net profit Equation of before
For Roadrunner 90*13000 -60*13000 - 130000 = 260000
For trailrunner 75*13000 - 50*13000 - 50000 = 275000
Max products they can sell 14000
in this scenario
for road runner: 90*14000-60*14000-130000 = 290000
for trail runner : 75*14000-50*14000-50000= 300000
As you can see in maximum no of units sold case also trail runner is giving more profit. So, company should opt for trail runner production only
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.