Question

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 76,000 units of product: net sales $1,520,000; total costs and expenses $1,780,000; and net loss $260,000. Costs and expenses consisted of the following.

		Total		Variable		Fixed
Cost of goods sold		$1,117,000		$611,000		$506,000
Selling expenses		514,000		93,000		421,000
Administrative expenses		149,000		56,000		93,000
		$1,780,000		$760,000		$1,020,000

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 $199,000 to total salaries of $36,000 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 0 decimal places, e.g. 2,510.)

Break-even point

$enter the break-even point in dollars rounded to 0 decimal places

(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 0 decimal places, e.g. 2,510.)

				Break-even point
1.		Increase selling price		$enter a dollar amount rounded to 0 decimal places
2.		Change compensation		$enter a dollar amount rounded to 0 decimal places
3.		Purchase machinery		$enter a dollar amount rounded to 0 decimal places

Which course of action do you recommend? select a course of action using the break-even analysis                                                           Alternative 1Alternative 2Alternative 3

Answer 1

The answer is attached below. Please refer

Thanks

Current Increase Change Buy Particulars Situatuation Selling Price Saleperson Salary Equipment Sale Units - A 76,000 76,000 76,000 76,000 Total Sales - B $ 1,520,000 Variable Cost-C $ 760,000 Sale Price per Unit - D=B/A 20$ 26's S 20 20 + (20*30%) = 26 Less : Variable Cost per Unit - E=C/A 10 $ 10 $ 1111.71 Contribution - FED-E 10 $ 10 $ 9 $ 8.29110 + (20*5% on sale Fixed Cost-G $ 1,020,000 $ 1,020,000 $ 857,000 $ 890,000 price) = 11 Break Even Point - (G/F)*D £ 2,040,000 £1,657,500 £ 1,904,4442,147,165 Formula : Break-even point dollar = (Fixed Cost/ Contribution per unit) *Sale price Refer Note 2 Conclusion: The Break even poin is lower in "Increase selling price", so choose that option Refere Note 2 £ 1,020,000 Note 1: Change In Sales Person Fixed Cost Less : Lowered Fixed Cost on Salary (199,000- 36000) Refer Note 1 £ £ 163,000 857,000 Note 2: Equipment Purchase Total Cost Less: Variable Cost (50% on 1,780,000) Fixed Cost Variable Cost per Unit (890,000/76,000 units) £ £ £ £ 1,780,000 890,000 890,000 1 1.71 Summary Current Situatuation £ 2,040,000 Increase Selling Price £ 1,657,500 Change Saleperson Salary £ 1,904,444 Buy Equipment £ 2,147,165 Conclusion: The Break even poin is lower in "Increase selling price", so choose that option