Question

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 $2,340,000; total costs and expenses $2,185,000; and net loss $-155,000. Costs and expenses consisted of the following.

		Total		Variable		Fixed
Cost of goods sold		$1,511,000		$1,018,000		$493,000
Selling expenses		521,000		94,000		427,000
Administrative expenses		153,000		58,000		95,000
		$2,185,000		$1,170,000		$1,015,000

Management is considering the following independent alternatives for 2017.

1.		Increase unit selling price 20% with no change in costs and expenses.
2.		Change the compensation of salespersons from fixed annual salaries totaling $202,000 to total salaries of $40,000 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 2017. (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 point

$enter the break-even point in dollars rounded to 0 decimal places

(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

				Break-even point
1.		Increase selling price		$enter a dollar amount rounded to 0 decimal places
2.		Change compensation		$enter a dollar amount rounded to 0 decimal places
3.		Purchase machinery		$enter a dollar amount rounded to 0 decimal places

Which course of action do you recommend? select a course of action using the break-even analysis                                                           Alternative 1Alternative 2Alternative 3

Answer 1

a	Midsland Inc
	Contribution margin Income statement
		2017
		78000	units
		Total	Per unit
	Sales	$23,40,000	$30.00
	Variable expenses:
	Cost of goods sold	$10,18,000	$13.05
	Selling expenses	$94,000	$1.21
	Administrative expenses	$58,000	$0.74
	Total Variable expenses	$11,70,000	$15.00
	Contribution margin	$11,70,000	$15
	Fixed expenses:
	Cost of goods sold	$4,93,000
	Selling expenses	$4,27,000
	Administrative expenses	$95,000
	Total Fixed expenses	$10,15,000
	Net operating income	$1,55,000
	Contribution margin ratio	50.00%
	Breakeven point in $(Fixed costs/Contribution margin ratio)	$20,30,000
b
1	Increase in unit selling price of 20%
		2017
		78000	units
		Total	Per unit
	Sales	$28,08,000	$36.00
	Variable expenses:
	Cost of goods sold	$10,18,000	$13.05
	Selling expenses	$94,000	$1.21
	Administrative expenses	$58,000	$0.74
	Total Variable expenses	$11,70,000	$15.00
	Contribution margin	$16,38,000	$21
	Fixed expenses:
	Cost of goods sold	$4,93,000
	Selling expenses	$4,27,000
	Administrative expenses	$95,000
	Total Fixed expenses	$10,15,000
	Net operating income	$6,23,000
	Contribution margin ratio	58.33%
	Breakeven point in $(Fixed costs/Contribution margin ratio)	$17,40,100
2	Change compensation of salespersons
		2017
		78000	units
		Total	Per unit
	Sales	$23,40,000	$30.00
	Variable expenses:
	Cost of goods sold	$10,18,000	$13.05
	Selling expenses($2,340,000*5%)	$1,17,000	$1.50
	Administrative expenses	$58,000	$0.74
	Total Variable expenses	$11,93,000	$15.29
	Contribution margin	$11,47,000	$14.71
	Fixed expenses:
	Cost of goods sold	$4,93,000
	Selling expenses	$2,02,000
	Administrative expenses	$95,000
	Total Fixed expenses	$7,90,000
	Net operating income	$3,57,000
	Contribution margin ratio	49.02%
	Breakeven point in $(Fixed costs/Contribution margin ratio)	$16,11,587
3	Change the Variable and Fixed cost of goods sold to 50:50
		2017
		78000	units
		Total	Per unit
	Sales	$23,40,000	$30.00
	Variable expenses:
	Cost of goods sold	$7,55,500	$9.69
	Selling expenses	$94,000	$1.21
	Administrative expenses	$58,000	$0.74
	Total Variable expenses	$9,07,500	$11.63
	Contribution margin	$14,32,500	$18.37
	Fixed expenses:
	Cost of goods sold	$7,55,500
	Selling expenses	$4,27,000
	Administrative expenses	$95,000
	Total Fixed expenses	$12,77,500
	Net operating income	$1,55,000
	Contribution margin ratio	61.22%
	Breakeven point in $(Fixed costs/Contribution margin ratio)	$20,86,736
	Alternative 2 is recommended as the Breakeven point is lowest