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Part I:

In October 2016, Hans Fritz (President) and Dana Boar (Controller) for Digital Electronics Canada were checking the budgeted figures for Digitals 2017 operations. Digitals parent company in New Zealand had established a target profit for Digital of $210,000 for the upcoming year. Hans and Dana wanted to make sure they could meet that target.

Company Information

In early, 2016, Digital Electronics, a large New Zealand manufacturer of transmission equipment, had set up a subsidiary in Canada to manufacture two products Digital had successfully marketed to Europe. One was a miniature signaling device used primarily for remote operation of garage doors. These DELTA1 units consisted of a signal sender, about half the size of a pack of cards, and a receiver, which was a bit larger. A large manufacturer of motorized garage doors had agreed to take a minimum of 100,000 DELTA1 control units a year. Hans and Dana thought that 120,000 units was a reasonable target for 2017.

Digital also had designed a similar device that could be used by a household to turn on inside lights when arriving after dark. This unit, called DELTA2, was slightly more expensive to make since the receiving part was a complete plug-in device while the DELTA1 receiver was a component of the garage door unit. Initially, Digital expected to sell the DELTA2 unit primarily through mail order catalogues. Hans and Dana projected sales of 60,000 for 2017.

The Budget

Looking at the budget, Dana indicated, 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.

Me, too, replied Hans. But were budgeting a monthly profit of $20,000, so we dont have a large margin for error. Lets see what level of sales would be required to provide the parent company with its target profit of $210,000 for the year.

To start, Dana pulled out the budgeted figures shown in Exhibit I. She recognized that the budget was only approximate since she expected that changes would be made to improve efficiency and perhaps the product design. But she thought the numbers were solid enough for her to use in her analysis of what was necessary to reach the parent companys target profit. In preparing her analysis, she decided to assume that 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.

Column1	Column2	Column3	Column4
Exhibit I
Digital Electronics
2017 Monthly Budget
Sales Revenue	DELTA1	DELTA2	Total
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 Cost
Parts	$55,000	$32,000	$87,000
Direct Labor	$35,000	$21,000	$56,000
Overhead (a)	$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			$40,000
Total expense			$295,000
Profit			$20,000
(a) Manufacturing overhead:
Supplies	$21,000
Occupancy (utilities, rent, maintenance)	$15,000
Equipment maintenance	$17,000
Equipment depreciation	$8,000
Quality control and production engineering	$15,000
Manufacturing administration	$36,000
Total manufacturing overhead	$112,000
In this budget, overhead is allocated to the two products on the basis of direct labor estimated for two products: $2.00 of overhead for each $1.00 of direct labor. Quantitative questions that need to be addressed: 1) What would breakeven sales volume be, assuming a ratio of two DELTA1 sold for each DELTA2 sold? 2) What level of sales would provide the profit target specified by the parent company of $210,000 for the year? (Assume that they sell all that they produce).

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