Question

Problem 20-1A 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 78,000 units of product: net sales $1,560,000; total costs and expenses $1,785,000; and net loss $225,000. Costs and expenses consisted of the following. Cost of goods sold Selling expenses Administrative expenses Total $1,114,000 519,000 152,000 $1,785,000 Variable $631,000 92,000 57,000 $780,000 Fixed $483,000 427,000 95,000 $1,005,000 Management is considering the following independent alternatives for 2017. 1. Increase unit selling price 25% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $ 201,000 to total salaries of $35,000 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 2016. (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 points (b) Compute the break-even point in dollars under each of the alternative courses of action for 2017. (Round contribution margin ratio to 4 decimal places e.g. 0.2510 and final answers to o decimal places, e.g. 2,510.) Break-even point 1. Increase selling price 2. Change compensations 3. Purchase machinerys Which course of action do you recommend?

Answer 1

Answer with working notes is given below

a) Break even point in $ for 2016 Fixed Cost $1,005,000 Contribution Margin % 50.00% $2,010,000 Cost of goods sold Selling expense Administrative expense Total Variable $631,000 $92,000 $57,000 $780,000 Fixed $483,000 $427,000 $95,000 $1,005,000 Total $1,114,000 $519,000 $152,000 $1,785,000 Total Sales Variable cost Contribution Contribution Margin % Total $1,560,000 $780,000 $780,000 50.00% Per unit $20 A $10 B $10 A-B 50.00% Contribution/Sales *100 Increase in selling price Change compensation purchase machinery Break even point $1,675,000 $1,864,444 $1,971,007 Alternative 1 is recommended since Break even point sales is lower Working note Selling price Variable cost Contribution Contribution Margin % $25 $10 $15 60.0000% Break even point in $ Fixed Cost Contribution Margin % $1,005,000 60.0000% $1,675,000 2 $20.00 Selling price Variable cost Commission on sales Contribution Contribution Margin % $10.00 $1.00 $9.00 45.0000% Break even point in $ Fixed Cost Contribution Margin % $839,000 45.0000% 25.000 $1,864,144 $1,864,444 Fixed cost Cost of goods sold Selling expense Administrative expense Total Fixed Cost $483,000 $261,000 ($427,000-$201,000+$35,000) $95,000 $839,000 3 Break even point in $ Fixed Cost Contribution Margin % $1,079,000 54.7436% $1,971,007 Cost of goods sold Selling expense Administrative expense Variable $557,000 $92,000 $57,000 $706,000 78,000 $9.05 Fixed $557,000 $427,000 $95,000 $1,079,000 Total $1,114,000 Composition changed to 50:50 $519,000 $152,000 $1,785,000 Units Unit Variable cost $20.00 Selling price Variable cost Contribution Contribution Margin % $9.05 $10.95 54.7436%