Question

CT18.2 The condensed income statement for the Peri and Paul partnership for 2022 is as follows. Peri and Paul Company Income Statement for the Year Ended December 31, 2022 Sales (240,000 units) $1,200,000 Cost of goods sold 800,000 Gross profit 400,000 Operating expenses Selling $300,000 Administrative 150,000 450,000 Net loss $ (50,000) A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 40% of the selling expenses are variable, and 40% of the administrative expenses are variable. Instructions (Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.)

a. Compute the break-even point in total sales dollars and in units for 2022.

b. Peri has proposed a plan to get the partnership “out of the red” and improve its profitability. She feels that the quality of the product could be substantially improved by spending $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $5.25 because of competitive pressures. Peri estimates that sales volume will increase by 25%. Compute net income under Peri’s proposal and the break-even point in dollars. (Round the contribution margin ratio to three decimal places.)

c. Paul was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Peri's: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling expenses by $40,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. Compute net income under Paul’s proposal and the break-even point in dollars. (Round the contribution margin ratio to three decimal places.)

d. Which plan should be accepted? Explain your answer.

Answer 1

2,40,000 $ 5.00 $ 12,00,000 2,40,000 $ 2.50 tot 6,00,000 2,00,000 8,00,000 4,00,000 $ Given Data: Sales Less : Cost of goods sold - Variable - Fixed Total Cost of goods sold Gross Profit Less : Operating Expenses Selling Expense - Variable - Fixed Administrative Expenses - Variable - Fixed Total Operating Expenses Net Loss 2,40,000 $ 0.50 $ 1,20,000 1,80,000 2,40,000 $ 0.25 to totoo 60,000 90,000 4,50,000 -50,000 Total 12,00,000 Income Statement - Contribution Format Particulars Units Per Unit Sales 2,40,000 $ 5.00 $ Less : Variable Expenses - Cost of goods sold 2,40,000 $ 2.50 $ - Selling Expenses 2,40,000 $ 0.50 $ - Administrative Expenses 2,40,000 $ 0.25 $ Contribution Margin $ 1.75 $ Less : Fixed Expenses - Cost of goods sold - Selling Expenses - Administrative Expenses Net Loss 6,00,000 1,20,000 60,000 4,20,000 HHH 2,00,000 1,80,000 90,000 -50,000

Requirment A Break-Even Point Break-Even Point (Dollars) = [Fixed Expenses + Contribution Margin Ratio) Total Fixed Expenses = $ 200,000 + $ 180,000 + $ 90,000 = $ 4,70,000 Contribution Margin Ratio = $ 420,000 - $ 1,200,000 = 35.00% Break-Even Point (Dollars) = Break-Even Point (Dollars) = Break-Even Point (Units) = [470,000 - 35%] $ 13,42,857 2,68,571 Units $ Total 15,75,000 Requirement B Revised Income Statement and BEP Particulars Units Per Unit Sales 3,00,000 $ 5.25 Less : Variable Expenses - Cost of goods sold 3,00,000 $ 2.75 - Selling Expenses 3,00,000 $ 0.50 - Administrative Expenses 3,00,000 $ 0.25 Contribution Margin $ 1.75 Less : Fixed Expenses - Cost of goods sold - Selling Expenses - Administrative Expenses Net Loss $ $ $ $ 8,25,000 1,50,000 75,000 5,25,000 2,00,000 1,80,000 90,000 55,000 Break-Even Point (Dollars) = [Fixed Expenses - Contribution Margin Ratio] Total Fixed Expenses = $ 200,000 + $ 180,000 + $ 90,000 = $ 4,70,000 Contribution Margin Ratio = $ 525,000 - $ 1,575,000 = 33.33% Break-Even Point (Dollars) = Break-Even Point (Dollars) = Break-Even Point (Units) = [470,000 - 33.33%] $ 14,10,000 2,68,571 Units

Total 18,24,000 Requirement C Revised Income Statement and BEP Particulars Units Per Unit Sales 3,84,000 $ 4.75 $ Less : Variable Expenses - Cost of goods sold 3,84,000 $ 2.50 $ - Selling Expenses 3,84,000 $ 0.59 $ - Administrative Expenses 3,84,000 $ 0.25 $ Contribution Margin $ 1.41 $ Less : Fixed Expenses - Cost of goods sold - Selling Expenses - Administrative Expenses Net Loss 9,60,000 2,26,560 96,000 5,41,440 2,00,000 2,20,000 90,000 31,440 Break-Even Point (Dollars) = [Fixed Expenses - Contribution Margin Ratio) Total Fixed Expenses = $ 200,000 + $ 220,000 + $ 90,000 = $ 5,10,000 Contribution Margin Ratio = $ 525,000 - $ 1,575,000 = 29.68% Break-Even Point (Dollars) = Break-Even Point (Dollars) = Break-Even Point (Units) = [510,000 - 29.68%] $17,18,085 3,61,702 Units Requirement D Which plan should be accepted ? Peri's Plan has Net Income of $ 55,000 whereas Paul's Plan has generated a Net Income of $ 31,440. And also according to Peri's Plan, we achieve at BEP very quickly. So, Peri's Plan is good.