Question

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. Total Variable Fixed Cost of goods sold Selling expenses Administrative expenses $1,568,000 517,000 150,000 $2,235,000 $1.050,000 92,000 58,000 1,200,000 $ 518,000 425,000 92,000 $1,035,000 Management is considering the following independent alternatives for 2020 I. 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?

Answer 1

	per unit	80000 units
Sales	25	2000000
Less: Variable costs
Cost of goods sold	13.125	1050000
Selling expenses	1.15	92000
Administrative expenses	0.725	58000
Total variable costs	15	1200000
Contribution	10	800000
CM Ratio(Unit Contribution/Unit Price)	40%
a.
Break-even point in dollars for 2019 = Total Fixed cost/CM Ratio
	=1035000/40%=		2587500
b.
1
	per unit
Sales	31.25
Less: Variable costs
Cost of goods sold	13.125
Selling expenses	1.15
Administrative expenses	0.725
Total variable costs	15
Contribution	16.25
CM Ratio(Unit Contribution/Unit Price)	52%
Break-even point in dollars for 2020 = Total Fixed cost/CM Ratio
	=1035000/52%=		1990385
2
Sales	25
Less: Variable costs
Cost of goods sold	13.125
Selling expenses	1.15
Administrative expenses	0.725
Commission	1.25
Total variable costs	16.25
Contribution	8.75
CM Ratio(Unit Contribution/Unit Price)	35%
Fixed costs = 1035000-(200000-40000)=	875000
Break-even point in dollars for 2020 = Total Fixed cost/CM Ratio
	=875000/35%=		2500000
3
Sales	25
Less: Variable costs
Cost of goods sold	9.8	=(1568000/2)/80000
Selling expenses	1.15
Administrative expenses	0.725
Total variable costs	11.675
Contribution	13.325
CM Ratio(Unit Contribution/Unit Price)	53.30%
Fixed costs=1035000+(1568000/2-518000)=	1301000
Break-even point in dollars for 2020 = Total Fixed cost/CM Ratio
	=1301000/53.3%=		2440901
Alternative 1 is the best as it has least break even Dollar sales.