Question

Compute break-even point under alternative courses of action. P6.1A (LO 1), AN Midlands Inc. had a bad year in 2019. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 80,000 units of product: net sales $2,000,000; total costs and expenses $2,235,000; and net loss $235,000. Costs and expenses consisted of the following. Cost of goods sold Selling expenses Administrative expenses Total $1,568,000 517,000 150,000 $2,235,000 Variable $1,050,000 92.000 58,000 $1,200,000 Fixed $ 518,000 425,000 92,000 $1,035,000 Management is considering the following independent alternatives for 2020. 1. Increase unit selling price 25% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $40,000 plus a 5% commission on net sales. 3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50. Instructions a. Compute the break-even point in dollars for 2019. b. Compute the break-even point in dollars under each of the alternative courses of action for 2020. (Round to the nearest dollar.) Which course of action do you recommend? b. (2) $2,500,000

Answer 1

Answers A) Break Even Point in Dollars 2587500 B) 1) increasing Selling Price 1990385 2) Change Compensation 2500000 3) Purchase Machinery 2440901 Whichcourse of Action Do you recommend Increasing Selling Price, alternative 1

Data total 1568000 517000 150000 2235000 Variable 1050000 92000 58000 1200000 Cost of goods Sold Selling Expenses Administrative Expenses total Sales Revneue Less:Varaible Cost Contribution Margin Less: Fixed Cost Net Loss Fixed 518000 425000 92000 1035000 2000000 1200000 800000 1035000 -235000 Break Even Dollars = Fixed Cost / CM Ratio CM Ratio = Contribution Margin / Sales CM Ratio = 800000/200000 Break Even Dollars =1035000/40% 40% 2587500

IF Units Selling Price is Increased by 25% Sales Revneue = (2000000*1.25)) 2500000 Less:Varaible Cost 1200000 Contribution Margin 1300000 CM Ratio = 1200000/2500000 52.00% Break Even Dollars = 1035000/0.5200 1990385 Compensations to Sales Persona from Fixed Annula Salaries to $40000 Plus 5% Common on net Sales Total Variable Fixed Reveised cost Data Cost of goods Sold 1568000 1050000 518000 Selling Expenses 457000 192000 265000 Administrative Expenses 150000 58000 92000 total 2175000 1300000 875000 Sales Revneue 2000000 Less:Varaible Cost 1300000 Contribution Margin 700000 CM Ratio =1300000/2000000 35.00% Break Even Dollars =875000/35% 2500000

Change the Proportion of Cost of good sold of Variable and Fixed into 50:50 Reveised cost Data Total Variable Fixed Cost of goods Sold 1568000 784000 784000 Selling Expenses 517000 92000 425000 Administrative Expenses 150000 58000 92000 total 2235000 934000 1301000 Sales Revenue 2000000 Less:Varaible Cost 934000 Contribution Margin 1066000 CM Ratio = 1066000/2000000 53.30% Break Even Dollars =1301000/53.30% 2440901