Question

Problem 5-4A (Video) Crane Corps sales slumped badly in 2020. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 505,500 units of product: sales $2,527,500, total costs and expenses $2.622.000, and net loss 594,500. Costs and expenses consisted of the amounts shown below. Cost of goods sold Selling expenses Administrative expenses Total $2,156,940 252,750 212,310 $2,622,000 Variable $1,658,040 93,012 68,748 $1,819,800 Fixed $498,900 159,738 143,562 $802,200 Management is considering the following independent alternatives for 2021. 1. Increase unit selling price 20% with no change in costs, expenses, and sales volume. 2. Change the compensation of salespersons from fixed annual salaries totaling $151,650 to total salaries of $60,660 plus a % commission on sales. Compute the break-even point in dollars for 2020. Break-even point Compute the contribution margin under each of the alternative courses of action. Contribution margin for alternative 1 Contribution margin for alternative 2 Compute the break-even point in dollars using the contribution margin ratio under each of the alternative courses of action Break-even point for alternative 1 Break-even point for alternative 2 Which course of action do you recommend?

Answer 1

Compute the break-even point in dollars for 2020 Cost of goods sold Selling expenses Administrative expenses Total $2,156,940 $252,750 $212,310 $2,622,000 Variable $1,658,040 $93,012 $68,748 $1,819,800 Fixed $498,900 $159,738 $143,562 $802,200 Variable cost per unit = $1,819,800 / 505,500 units = $3.60 per unit Sales price per unit = $2,527,500 / 505,500 units = $5 per unit Contribution margin per unit = $5 - $3.60 = $1.40 per unit Breakeven unit = $802,200 / $1.40 = 573,000 units Breakeven dollars = 573,000 units x $5 per unit = $2,865,000 1. Increase unit selling price 20% with no change in costs, expenses, and sales volume. New selling price = $5 x 1.20 = $6 Variable cost per unit = $3.60 Contribution margin per unit = $6 - $3.60 = $2.40 per unit Total contribution margin = $2.40 x 505,500 = $1,213,200 Breakeven unit = $802,200 / $2.40 = 334,250 units Breakeven dollars = 334,250 units x $6 per unit = $2,005,500

2. Change the compensation of salespersons from fixed annual salaries totalling $151,650 to total salaries of $60,600 plus a 4% commission on sales. Cost of goods sold Selling expenses Administrative expenses Total $2,156,940 $252,750 $212,310 $2,622,000 Variable $1,658,040 $194,112 $68,748 $1,920,900 Fixed $498,900 $68,748 $143,562 $711,210 Selling price = $5 per unit New variable cost per unit = $1,920,900 / 505,500 units = $3.80 per unit Contribution margin per unit = $5 - $3.80 = $1.20 per unit Total contribution margin = $1.20 x 505,500 units = $606,600 Breakeven units = $711,210 / $1.20 = 592,675 units Breakeven dollars = 592,675 units x $5 per unit = $2,963,375 Which course of action do you recommend? I recommend alternative 1 as it gives a larger contribution margin and a smaller breakeven point.