Question

Midlands Inc. had a bad year in 2019. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 79,000 units of product: net sales $1,975,000; total costs and expenses $1,997,300; and net loss $22,300. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold Selling expenses $1,345,250 $840,500 $504,750 506,050 91,000 415,050 146,000 56,000 90,000 $1,997,300 $987,500 $1,009,800 Administrative expenses Management is considering the following independent alternatives for 2020. 1. Increase unit selling price 25% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $199,000 to total salaries of $42,985 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 2019. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answer to 0 decimal places, e.g. 2,510.) Break-even point $

Answer 1

					total	per unit
	Sales				1,975,000	25
	less :variable expense
	cost of goods sold				840,500	10.63924
	selling expense				91,000	1.151899
	administrative expense				56,000	0.708861
	total variable expense				987,500	12.5
	contribution margin				987,500	12.5
	contribution margin = contribution/sales
			987,500/1975000
			0.5
a)	Break even point (dollars) = total fixed cost/contribution margin ratio
			1,009,800/50%
			2019600	answer
b)
1)	increase selling price 25%
	Selling price per unit (25*125%)=					31.25
	less variable cost per unit					12.5
	contribution margin per unit					18.75
	Break even point = 1,009,800*31.25/18.75
			1683000	answer
2)	Change compensation
	selling price per unit					25
	variable cost per unit				12.5
	5% commission on sales (20*5%)				1.25	13.75
	Contribution margin per unit					11.25
	Fixed cost
	total fixed cost					1,009,800
	less:Reduced					-199,000
	add:Salaries					42,985
	new fixed cost					853,785
	BEP(dollars) = 853785/45%
		1897300	answer
3)					Variable	Fixed
	cost of goods sold				672,625	672,625
	Selling expense				91,000	415,050
	Administrative expense				56,000	90,000
	total				819,625	1,177,675
	contribution = 1,975,000-819625
		1,155,375
	contribution margin ratio =819625/1155375
			58.5000%
	Break even            =		1,177,675/58.5
			2013120	answer
	Alternative 1