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

Answer :-

	per unit	80000 units
sales	25	2000000
less; variable costs
selling expenses	13.125	1050000
cost of good sold	1.15	92000
administrative expenses	0.725	58000
total variable costs	15	1200000
contribution	10	800000
CM Ration=unit contribution / unit price	40%

Break even point in dollars for 2019 = (Total fixed cost / CM ratio )

Break even point in dollars for 2019 = 1035000 / 40%

Break even point in dollars for 2019 = 2587500