Question

Problem 11-3

Pina Colada Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 585,500 units of product: sales $2,927,500, total costs and expenses $3,044,600, and net loss $117,100. Costs and expenses consisted of the amounts shown below.

		Total		Variable		Fixed
Cost of goods sold		$2,505,940		$1,861,890		$644,050
Selling expenses		292,750		107,732		185,018
Administrative expenses		245,910		79,628		166,282
		$3,044,600		$2,049,250		$995,350

Management is considering the following independent alternatives for 2018.

1.		Increase unit selling price 21% with no change in costs, expenses, and sales volume.
2.		Change the compensation of salespersons from fixed annual salaries totaling $175,650 to total salaries of $70,260 plus a 5% commission on sales.

(a) Compute the break-even point in dollars for 2017. (Round final answer to 0 decimal places, e.g. 1,225.)

Break-even point

$

(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, e.g. 1,225.)

Break-even point for alternative 1		$
Break-even point for alternative 2		$

Which course of action do you recommend?

Alternative 1Alternative 2

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Answer 1

Answers A) Break Even Point in Dollars 3317833 B) Break Even Point for Alternative 1 Break Even Point for Alternative 2 2369881 3559840 Whichcourse of Action Do you recommend Increasing Selling Price: Alternative 1

Data total Variable Fixed Cost of goods Sold Selling Expenses Administrative Expenses 2505940 1861890 644050 185018 292750 107732 245910 79628 166282 total 3044600 2049250 995350 Sales Revneue Less:Varaible Cost Contribution Margin Less: Fixed Cost Net Loss 2927500 2049250 878250 995350 -117100 Break Even Dollars = Fixed Cost / CM Ratio CM Ratio Contribution Margin / Sales CM Ratio 878250/2927500 30.00% Break Even Dollars =995350/30% 3317833

IF Units Selling Price is Increased by 21% Sales Revneue = 585500*5*1.21 Less:Varaible Cost Contribution Margin 3542275 2049250 1493025 CM Ratio 1493025/3542275 42% Break Even Dollars -995350/42% 2369881 Compensations to Sales Persona from Fixed Annula Salaries to $70260 Plus 5% Common on net Sales Total Variable Fixed Reveised cost Data Cost of goods Sold Selling Expenses Administrative Expenses total Sales Revneue Less:Varaible Cost Contribution Margin 644050 2505940 1861890 254107 333735 79628 245910 79628 166282 889960 2927500 3085585 2195625 2195625 731875 25.00% CM Ratio 731875/2927500 Break Even Dollars -889960/25% 3559840