Question

Cullumber and Paul Company Income Statement For the Year Ended December 31, 2020
Sales (270,000 units)				$1,350,000
Cost of goods sold				900,000
Gross profit				450,000
Operating expenses
Selling		$315,000
Administrative		175,500
				490,500
Net loss				$(40,500	)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.

Cullumber 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. Cullumber estimates that sales volume will increase by 25%. Compute the net income under Cullumber's proposal and the break-even point in dollars. (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.)

		Amount
Net income		$
Break-even point		$

Paul was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Cullumber’s: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling expenses by $43,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. Compute the net income under Paul’s proposal and the break-even point in dollars. (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.)

		Amount
Net income		$
Break-even point		$

Answer 1

	Current	Proposed-1	Proposed-2
Selling price per unit	5	1,771,875	2,052,000
Variable costs
Cost of goods sold per unit	2.5	928,125	1,080,000
Selling Expenses per unit	0.49	165,375	254,880
Admin Expense per unit	0.26	87,750	112,320
Contribution Margin per unit	1.75	590,625	604,800
Fixed costs
COGS	225000	225,000	225,000
Selling Expense	182700	182,700	225,700
Admin Expense	105300	105,300	105,300
Net Operating Income		77,625	48,800
CM Ratio = CM/Sales		33.3333%	29.4737%
Break even point = Fixed costs/CM Ratio		1,539,000	1,886,429

- Current =1350000/270000 Proposed-1 =5.25*270000*1.25 Proposed-2 =(B2-0.25)*270000*1.6 =900000*75%/270000 =(B4+0.25)*270000*1.25 =B4*270000*1.6 =315000*42%/270000 =B5*270000*1.25 =0.59*270000*1.6 =175500*40%/270000 1=B6*270000*1.25 =B6*270000*1.6 =B2-SUM(B4:B6) =C2-SUM(C4:C6) =D2-SUM(D4:06) 1 2 Selling price per unit 3 Variable costs 4 Cost of goods sold per unit 5 Selling Expenses per unit 6 Admin Expense per unit 7 Contribution Margin per unit 8 Fixed costs 9 COGS 10 Selling Expense 11 Admin Expense 12 Net Operating Income 13 14 CM Ratio = CM/Sales 15 Break even point = Fixed costs/CM Ratio =900000*25% =315000*58% =175500*0.6 =900000*25% =315000*58% =175500*0.6 =C7-SUM(C9:C11) =C9 =C10+43000 =C11 =D7-SUM(D9:D11) =C7/02 =SUM(C9:C11)/C14 =D7/D2 =SUM(D9:D11)/D14