Question

PHAN AND NGUYEN LLP Income Statement Year Ending December 31, 2020 Sales (240,000 units) Cost of goods sold Gross profit Operating expenses Selling $280,000 Administrative 150,000 Net loss $1,200,000 800,000 400,000 430,000 $ (30,000) A cost behaviour analysis indicates that 75% of the cost of goods sold is variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.

Phan 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. Phan estimates that sales volume will increase by 25%. What effect would phans plan have on the partnerships profits and its break-even point in dollars?

Answer 1

Income statement before change Particulars Calculation Amount Per unit Sales (A) $ 12,00,000.00 $ 5.00 Variable Costs: Cost of Goods sold (75%) 800,000 x 75% = 600,000 $ 2.50 Selling Expense (42%) 280,000 x 42% = 117,600 $ 0.49 Administrative expense (40%) | 150,000 x 40% = 60,000 $ 0.25 Total Variable cost (B) S 7.77.600.00 S 3.24 Contribution Marging (A) - (B) $ 4,22,400.00 $ 1.76 Fixed Costs Cost of Goods sold (25%) 800,000 x 25% = 200.000 Selling Expense (58%) 280.000 x 58% = 162.400 Administrative expense (60%) 150,000 x 60% = 90.000 Total Fixed cots (C) $ 4.52.400.00 Net Loss (A) - (B)-(C) $ 30,000.00 $ -0.13

Income statement for proposed paln Particulars Calculation Amount Per unit Sales (A) (240.000 x 125%) x $5.25 S 15.75,000.00 $ 5.25 Variable Costs: Cost of Goods sold (75%) ($2.5 + $0.25) x 300,000 units $ 2.75 Selling Expense (42%) $0.49 x 300.000 units $ 0.49 Administrative expense (40%) $0.25 x 300.000 units $ 0.25 Total Variable cost (B) $ 10,47,000.00 $ 3.49 Contribution Marging (A) - (B) $ 5,28,000.00 $ 1.76 Fixed Costs Cost of Goods sold (25%) 800,000 x 25% = 200.000 Selling Expense (58%) 280,000 x 58% = 162.400 Administrative expense (60%) | 150,000 x 60% = 90,000 Total Fixed cots (C) $ 4,52,400.00 Net Profit+ (A) - (B) - (C) $ 75,600.00 S 0.25

1. The net loss changed to a net profit of $75,600 with the proposed change.

2. Break even Sales = Fixed Cost / Contribution margin %

Case 1: Before change

Fixed Cost = $452,400

Contribution Margin % = (Contribution / Sales) x 100 = ($422,400 / 1,200,000) x 100 = 35.2%

Break even Sales = $452,400 / 35.2% = $1,285,227 (Rounded off)

Case 2: After change

Fixed Cost = $452,400

Contribution Margin = ($528,000 / $1,575,000) x 100 = 33.52%

Break even Sales = $452,400 / 33.52% = $1,349,642 (Rounded off)

So break even sales has increases with proposed change.