Question

Current Attempt in Progress 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 78,000 units of product: net sales $1,560,000; total costs and expenses $1,795,200; and net loss $235,200. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,125,600 $633,000 $492,600 Selling expenses 522,600 90,000 432,600 Administrative expenses 147,000 57,000 90,000 $1,795,200 $780,000 $1,015,200 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 $ 202,000 to total salaries of $40,990 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. (a) Compute the break-even point in dollars for 2019. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answer to 0 decimal places, e.g. 2,510.) Break-even point $ (b) Compute the break-even point in dollars under each of the alternative courses of action for 2020. (Round contribution margin ratio to 3 decimal places e.g. 0.251 and final answers to 0 decimal places, e.g. 2,510.) Break-even point 1. Increase selling price $ 2. Change compensation $ 3. Purchase machinery $ Which course of action do you recommend? Save for Later Attempts: 0 of 7 used Submit Answer

Answer 1

1) Break even point in dollars for 2019: Break even point (dollars) = Fixed costs / Contribution margin ratio = $1,015,200 / 0.5000 = $2,030,400 Workings: Contribution margin ratio = (Sales - Varible costs) / Sales = ($1,560,000 - $780.000) / $1,560,000 = 0.5000 2) 1. Break even point in dollars for 2020: Increase selling price = $1,692,000 Workings: Increase unit selling price 25%= $25 [(S1,560,000 / 78,000) + ($1,560.000 / 78,000) * 25%] Break even point (dollars) = Fixed costs / Contribution margin ratio = $1,015,200 / 0.600 = $1.692.000 Contribution margin ratio = (Sales - Varible costs) / Sales = [($25 * 78,000 units) - $780.000] / ($25 * 78.000 units) = ($1,950,000 - $780,000) / $1,950,000 0.600 2. Change compensation = $1,898,200 Workings: Change in fixed cost (S202,000 - $40.990) $161.010 Contribution margin ratio = (Sales - Varible costs - 5% commission on net sales) / Sales = ($1,560,000 - $780,000 - $78,000) / $1,560,000 0.450 Break even point (dollars) = Fixed costs / Contribution margin ratio = ($1,015,200 - $161,010)/0.450 = $1,898,200 3. Purchase machinery = $1,991,560 Workings: Cost of goods sold (50:50) Selling expenses Administrative expenses Total $1,125,600 $522,600 $147.000 $1,795,200 Variable Fixed $562.800 $562.800 $90,000 $432.600 $57,000 $90,000 $709.800 $1,085,400 Contribution margin ratio = (Sales - Varible costs) / Sales = ($1.560,000 - $709.800)/$1.560.000 0.545 Break even point (dollars) = Fixed costs / Contribution margin ratio = $1,085,400/0.545 = $1.991,560 Which course of action do you recommend = Alternative 1 Increase selling price break-even point in dollar is lower.