Question

The condensed income statement for the Carla Vista and Paul partnership for 2020 is as follows.

Carla Vista 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		$270,000
Administrative		189,000
				459,000
Net loss				$(9,000	)

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.

Carla Vista 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. Carla Vista estimates that sales volume will increase by 25%. Compute the net income under Carla Vista'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 Carla Vista’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 $46,000. 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

Firstly lets derive the fixed and variable costs per unit and selling price in the existing condition

Details	Calculation	Total	Per unit (Total/270,000)
Fixed Costs
COGS	(100-75)% * 900,000	$      225,000.00	$                   0.8333
Selling Expenses	(100-42)% * 270,000	$      156,600.00	$                   0.5800
Administrative Expenses	(100-40)% * 189,000	$      113,400.00	$                   0.4200
Total fixed costs		$      495,000.00	$                   1.8333
Variable Costs
COGS	75% * 900,000	$      675,000.00	$                   2.5000
Selling Expenses	42% * 270,000	$      113,400.00	$                   0.4200
Administrative Expenses	40% * 189,000	$        75,600.00	$                   0.2800
Total variable cost		$      864,000.00	$                   3.2000
Selling price		$ 1,350,000.00	$                   5.0000

Solution for Carla Vista Propos

As per Carla Vista’s proposal, the changed amounts will be as follows

Selling price per unit = $ 5.25

COGS per unit = $ 2.5 + $ 0.25 = $ 2.75

Number of units sold = 125%*270,000 = 337,500

Net income per Carla Vista proposal	Calculation	Sub-total	Total
Sales	337,500 units * $ 5.25 per unit		$       1,771,875.00
Less: COGS			$     (1,153,125.00)
Variable	337,500 units * $ 2.75 per unit	$      928,125.00
Fixed		$      225,000.00
Gross Profit	Sales - COGS		$           618,750.00
Less: Operating Expenses			$        (506,250.00)
Variable (Selling and Administrative Exps)	337,500 units * ($ 0.42+$ 0.28)	$      236,250.00
Fixed (Selling and Administrative Exps)	$ 156,600 + $ 113,400	$      270,000.00
Net Income			$           112,500.00

Break-Even Point in sales quantity = Fixed Costs /(Selling Price per unit – Variable Costs per unit)

= $ 495,000 / ($ 5.25 - $ 3.45) = 275,000 units

Break Even Sales = 275,000 units * $ 5.25 per unit

                                = $ 1,443,750.00

As per Paul’s proposal, the changed amounts will be as follows:

Variable selling expense per unit = $ 0.59

Selling price per unit = $ 4.75

Fixed selling expenses = $ 202,600 (i.e. 156,600 + 46,000)

Number of units sold = 432,000 (160% * 270,000)

Net income per Paul's proposal	Calculation	Sub-total	Total
Sales	432,000 units * $ 4.75 per unit		$       2,052,000.00
Less: COGS			$     (1,305,000.00)
Variable	432,000 units * $ 2.5 per unit	$ 1,080,000.00
Fixed		$      225,000.00
Gross Profit	Sales - COGS		$           747,000.00
Less: Operating Expenses			$        (691,840.00)
Variable (Selling and Administrative Exps)	432,000 units * ($ 0.59 + $ 0.28)	$      375,840.00
Fixed (Selling and Administrative Exps)	$ 202,600 + $ 113,400	$      316,000.00
Net Income			$             55,160.00

  

Break-Even Point in sales quantity = Fixed Costs /(Selling Price per unit – Variable Costs per unit)

                                                       = $ 541,000 / ($ 4.75 - $ 3.37) = 392,029 units

Break Even Sales = 392,029 units * $ 4.75 per unit

                                = $ 1,862,137