80.2K

Verified Solution

Link Copied!

Alamo Security, Inc.

In October 2020, Maria Lopez, President, and Mark Baer, Controller, of Alamo Security, Inc., were checking the budgeted figures for Alamos 2021 operations. Alamos parent company in Germany had established a target profit for Alamo of $210,000 for the upcoming year. Lopez and Baer wanted to make sure they could meet that target.

In early, 2020, Munich Security GmBH, a large German manufacturer of radio equipment, had set up a subsidiary in the United States to manufacture two products Munich had successfully marketed in Europe. One was a miniature signaling device used primarily for remote operation of garage doors. These RC1 units consisted of a signal sender, about half the size of a pack of cards, and a receiver, which was a bit larger. They contained a high security chip which gave them an advantage over almost all other units in the marketplace. A large manufacturer of motorized garage doors had agreed to take a minimum of 100,000 RC1 control units a year. Lopez and Baer thought that 120,000 units was a reasonable target for 2021 from this customer.

Munich Security had also designed a similar device that could be used by a householder to turn on inside lights when arriving after dark. This unit, called RC2, was slightly more expensive to make since the receiving part was a complete plug-in device, while the RC1 receiver was a component of the garage door unit. Initially, Munich Security expected to sell the RC2 unit primarily online. Initially, Lopez and Baer projected sales of 60,000 of thee units for 2021.

Looking at the budget (see last page), Baer observed, Im relieved to see that our projection results in a budgeted profit that exceeds the target of $210,000 profit for next year expected by the parent company, Munich Security.

Me too, replied Lopez. But were budgeting a monthly profit of $20,000, so we dont have a large margin for error. I think we should look at a few things.

• First, lets see what level of sales would be required to provide the parent company with its targeted profit of $210,000 for the year.

• Second, whats our break-even volume assuming our mix stays the same two RC1 units for each RC2?

• Third, whats our manufacturing cost per unit if we produce only 8,000 RC1 units and 4,000 RC2 units per month?

• Fourth, whats our profit if each month we only sell 8,000 RC1 units and 4,000 RC2 units, but we produce 10,000 RC1s and 5,000 RC2s, assuming the unsold units go into finished good inventory?

Baer hurried off to do his analysis. To start, he pulled out the budgeted figures shown below. He recognized that the budget was only approximate since he expected that changes would be made to improve efficiency and perhaps the product design. But he thought the numbers were solid enough for him to use in his analysis of what was necessary to reach the parent companys target profit. In preparing his analysis, he decided to assume the parts, direct labor, and supplies could be considered variable with units produced, and all the rest would be fixed within the time frame and volume range being considered.

2021 Monthly Budget

	RC1	RC2	Total
Sales Revenue
Produce and sell per month	10,000 units	5,000 units
Projected selling price	$20.00	$23.00
Sales revenue	$200,000	$115,000	$315,000
Manufacturing Costs
Parts	$55,000	$32,000	$87,000
Direct labor	$35,000	$21,000	$56,000
Overhead see below	$70,000	$42,000	$112,000
Total manufacturing cost	$160,000	$95,000	$255,000
Manufacturing cost per unit	$16.00	$19.00
Selling and Administrative Expenses			40,000
Total expense			$295,000
Profit before tax			$20,000
Manufacturing Overhead
Supplies	$21,000
Utilities, rent, maintenance	15,000
Equipment maintenance	17,000
Equipment depreciation	8,000
Quality control and engineering	15,000
Manufacturing administration	36,000
Total manufacturing overhead	$112,000

Answer & Explanation Solved by verified expert

See Answer