Question

Johnson Corporation had a bad year in 2019. For the first time, in history, it operated at a loss. The company's income statement showed the following results from selling 79,000 units of product: net sales $1,975,000; total costs and expenses $1,997,300; and net loss $22,300. Costs and expenses consisted of the following:

Total Variable Fixed

_____________________________________________________________________________________________________

Costs of goods sold $1,345,250 $840,500 $504,750

______________________________________________________________________________________________________

Selling expenses $506,050 $91,000 $415,050

______________________________________________________________________________________________________

Administrative expenses $146,000 $56,000 $90,000

_______________________________________________________________________________________________________

$1,997,300 $987,500 $1,009,800

_______________________________________________________

_______________________________________________________

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 $199,000 to total salaries of $42,985 plus 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

Break even point: $________________

(b) Compute the break-even point in dollars under each of the alternative courses of action for 2020:

Break-even point:

_________________

1. Increase selling price: $ ?

2. Change compensation $ ?

3. Purchase machinery $ ?

Which course of action do you recommend? Alternative 1, Alternative 2 or Alternative 3?

Answer 1

Break-even = Fixed costs/((Sales-variable costs)/Sales) = $1009800 / [($1975000 - $987500) / $1975000] = $1009800 / ($987500 / $1975000) = $1009800 / $0.5 = $2019600

1) Break-even = Fixed Cost/((Sales - Variable costs) / Sales) = ($1009800 / [($1975000*1.25 - $987500) / $1975000*1.25] = $1009800 / [($2468750 - $987500) / $2468750] = $1009800 / ($1481250 / $2468750) = $1009800 / $0.6 = $1683000 2) Break-even = Fixed Cost/((Sales - Variable costs) / Sales) = ($1009800 - $199000 +$42985)/[{$1975000 - 987500+ 1975000*0.05)}/$1975000] = ($853785 / [($1975000 - $1086250) / $1975000] = $853785/($888750 / $1975000) = $853785 / 0.45 = $1897300 3) Break-even = Fixed Cost / ((Sales - Variable costs) / Sales) = ($1009800 - $504750 + $1345250 /2)/[($1975000 - ($987500 - $840500 + $1345250 /2))/ $1975000] = ($1009800 - $504750 + $672625)/[($1975000 - ($987500 - $840500 + $672625))/ $1975000] = $1177675/($1155375 / $1975000) = $1177675 / 0.585 = $2013120 Alternative 1 is recommended course of action using breakeven analysis because it has the lowest break even point.