Question

Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 575,500 units of product: sales $2,877,500, total costs and expenses $2,992,600, and net loss $115,100. Costs and expenses consisted of the amounts shown below.

		Total		Variable		Fixed
Cost of goods sold		$2,463,140		$1,830,090		$633,050
Selling expenses		287,750		105,892		181,858
Administrative expenses		241,710		78,268		163,442
		$2,992,600		$2,014,250		$978,350

Management is considering the following independent alternatives for 2018.

1.		Increase unit selling price 20% with no change in costs, expenses, and sales volume.
2.		Change the compensation of salespersons from fixed annual salaries totaling $172,650 to total salaries of $69,060 plus a 5% commission on sales.

(a) Compute the break-even point in dollars for 2017. (Round final answer to 0 decimal places, e.g. 1,225.)

Break-even point

$

(b) Compute the contribution margin under each of the alternative courses of action. (Round final answer to 0 decimal places, e.g. 1,225.)

Contribution margin for alternative 1		%
Contribution margin for alternative 2		%

Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, e.g. 1,225.)

Break-even point for alternative 1		$
Break-even point for alternative 2		$

Which course of action do you recommend?

Answer 1

• Requirement [a]

A	Net Sales	$                                          2,877,500
B	Variable Cost	$                                          2,014,250
C = A - B	Contribution margin	$                                              863,250
D = C/A	CM Ratio	0.3000
E	Total Fixed Cost	$                                              978,350
F = E/D	Break Even in	$                                          3,261,167 Answer

• Requirement [b]

Contribution margin for alternative 1		42 %
Contribution margin for alternative 2		25 %

--Working

#1: Increasing selling price
A	Current Sales	$                                          2,877,500
B = A x 20%	Increase in Sale	$                                              575,500
C = A + B	2020's sale	$                                          3,453,000
D	Variable Cost	$                                          2,014,250
E = C - D	Contribution margin	$                                          1,438,750
F = E/C	CM Ratio	0.4167 or 42%

#2 Change Compensation
	Variable Cost	Fixed Cost
Current	$                                          2,014,250	$                                                           978,350
Old compensation		$                                                        (172,650)
New compensation	$                                              143,875	$                                                             69,060
New Costs for 2020	$                                          2,158,125	$                                                           874,760
A	2020's sale	$                                                       2,877,500
B	Variable Cost	$                                                       2,158,125
C = A - B	Contribution margin	$                                                           719,375
D = C/A	CM Ratio	0.250 or 25%

• Break even point

Break-even point for alternative 1	[$1035000 / 42%]	$ 2,464,286
Break-even point for alternative 2	[$ 874,760/25%]	$ 3,499,040

--Alternative 1 is RECOMMENDED as it has lower Break even point level