Question

Problem 19-3B P19-38 Olgive Company had a bad year in 2016. For the first time in its history, operated at a loss The company's income statement showed the following results from selling 60.000 units of product sales $1,800,000: total costs and expenses $2,010,000, and net loss $210,000. Costs and expenses consisted of the amounts shown below Cost of goods sold Selling expenses Administrative expenses Total $1,350,000 480 000 180 000 S2.010.000 Variable $ 930,000 125 000 115.000 $1.170.000 Fixed $420,000 355 000 65.000 5840.000 Management is considering the following independent alternatives for 2017 1. Increase unit selling price 25% with no change in costs, expenses, and sales volume 2. Change the compensation of salespersons from fixed annual salaries totaling $200 000 to total salaries of $20 000 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 Instructions (a) Compute the break-even point in dollars for 2016 (b) Compute the break even point in dollars under each of the alternative courses of action (Round all ratios to nearest full percent) Which course of action do you recommend? a) Y Sales were S/.800,000 and variable expenses were $1,170,000, which means contribution margin way $630,000 and CM ratio was 35% (-1) FYI: The effect of this alternative is to increase the selling price per unit to $37.50 (530 X 125% (0-2) FYI: The effects of this alternative are to change total fixed costs to S660.000 (5840,000 - $180,000) and to change the contribution margin to 30 ($1,800,000 - $1,170,000 - $90,000) $1.800.000 D-3) FYI: The effects of this alternative are: (1) variable and forced cost of goods sold become 5675,000 each, (2) total variable costs become $915,000 (5675,000+ $125,000 - $115,000), and (3) total fixed costs are $1.095.000 (5675,000 $355,000 + $65.000). Show your calculation.

Answer 1

Answer with working notes is given below

a) Break even point for 2016 Sales Variable cost Contribution Contribution Margin % $1,800,000 $1,170,000 $630,000 35.00% Break even point Sales dollars Fixed Cost Contribution Margin % $840,000 35% $2,400,000 b1) Break even point Sales dollars Fixed Cost Contribution Margin % $840,000 48% 000 Selling price Variable cost Contribution per unit Contribution Margin % $37.50 Increase by 25% $19.50 $18.00 48% b2) Break even point Sales dollars Fixed Cost Contribution margin % $660,000 30% $2,200,000 Selling price Variable cost Commission Contribution per unit Contribution margin % $30.00 $19.50 $1.50 5% of $30 $9.00 30% Revised Fixed cost Existing Less: Fixed annual salaries New salaries Revised Fixed cost $840,000 -$200,000 $20,000 $660,000 b3) Break even point Sales dollars Fixed Cost Contribution margin % $1,095,000 49.17% $2,227,119 Sales Variable cost Contribution Contribution margin % (Contribution/Sales)% $1,800,000 $915,000 $885,000 49.17% Cost of goods sold Selling expenses Administrative expenses Total cost Variable cost Fixed cost Total $675,000 $675,000 $1,350,000 50% equal $125,000 $355,000 $480,000 $115,000 $65,000 $180,000 $915,000 $1,095,000 $2,010,000