Question

Problem 19-1A

Midlands Inc. had a bad year in 2016. 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 $1,950,000; total costs and expenses $1,795,000; and net loss $-155,000. Costs and expenses consisted of the following:

Problem 19-1A Midlands Inc. had a bad year in 2016. 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 $1,950,000; total costs and expenses $1,795,000; and net loss $-155,000. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold Selling expenses Administrative expenses $1,130,000 518,000 147,000 $1,795,000 $633,000 90,000 57,000 $780,000 $497,000 428,000 90,000 $1,015,000 Management is considering the following independent alternatives for 2017. 1. Increase unit selling price 30% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $202,000 to total salaries of $41,000 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. (a) Compute the break-even point in dollars for 2017. (Round contribution margin ratio to 2 decimal places e.g. 0.25 and final answer to o 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. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to O 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?

Answer 1

Answers A) Break Even Point in Dollars 1691667 B) 1) increasing Selling Price 1466127 2) Change Compensation 1552727 3) Purchase Machinery 1705780 Which course of Action Do you recommend Increasing Selling Price , alternative 1

Data total 1130000 518000 147000 1795000 variable 633000 90000 57000 780000 Cost of goods Sold Selling Expenses Administrative Expenses total Sales Revneue Less:Varaible Cost Contribution Margin Less: Fixed Cost Net Loss Fixed 497000 428000 90000 1015000 1950000 780000 1170000 1015000 155000 Break Even Dollars = Fixed Cost / CM Ratio CM Ratio = Contribution Margin / Sales CM Ratio - 1170000/1950000 Break Even Dollars =1015000/60% 60% 1691667

IF Units Selling Price is Increased by 30% Sales Revneue = (1950000*1.30)) 2535000 Less:Varaible Cost 780000 Contribution Margin 1755000 CM Ratio - 1755000/2535000 69.23% Break Even Dollars =1015000/0.6923 1466127 Compensations to Sales Persona from Fixed Annula Salaries to $41000 Plus 5% Common on net Sales Total Variable Fixed Reveised cost Data Cost of goods Sold 1130000 633000 497000 Selling Expenses 454500 187500 267000 Administrative Expenses 147000 57000 90000 total 1731500 877500 8540001 Sales Revneue 1950000 Less:Varaible Cost 877500 Contribution Margin 1072500 CM Ratio =1072500/195000 55.00% Break Even Dollars =854000/55% 1552727

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 1130000 565000 565000 Selling Expenses 518000 90000 428000 Administrative Expenses 147000 57000 90000 total 1795000 712000 1083000 Sales Revenue 1950000 Less:Varaible Cost 712000 Contribution Margin 1238000 CM Ratio - 1238000/1950000 63.49% Break Even Dollars =1083000/0.6349 1705780