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 75,000 units of product: net sales $1,500,000; total costs and expenses $1,620,000; and net loss $120,000. Costs and expenses consisted of the following.

	Total	Variable	Fixed
Cost of Goods Sold	$962,000	$451,000	$511,000
Selling Expenses	510,000	91,000	419,000
Administrative Expenses	148,000	58,000	90,000
	$1,620,000	$600,000	$1,020,000

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 $205,000 to total salaries of $35,025 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.)

(b) Compute the break-even point in dollars under each of the alternative courses of action for 2020. (Round contribution margin ratio to 3 decimal places e.g. 0.251 and final answers to 0 decimal places, e.g. 2,510.)

	Break-even point
1) increase selling price	$
2) change compensation	$
3) purchase machinery	$

Answer 1

					total	per unit
	Sales				1,500,000	20
	less :variable expense
	cost of goods sold				451,000	6.013333
	selling expense				91,000	1.213333
	administrative expense				58,000	0.773333
	total variable expense				600,000	8
	contribution margin				900,000	12
	contribution margin = contribution/sales
			900,000/1,500,000
			0.6
a)	Break even point (dollars) = total fixed cost/contribution margin ratio
			1020000/60%
			2040000	answer
b)
1)	increase selling price 25%
	Selling price per unit (20*125%)=					25
	less variable cost per unit					8
	contribution margin per unit					17
	Break even point = 1,020,000/17*25
			1500000	answer
2)	Change compensation
	selling price per unit					20
	variable cost per unit				8
	5% commission on sales (20*5%)				1	9
	Contribution margin per unit					11
	Fixed cost
	total fixed cost					1,020,000
	less:Reduced					-205,000
	add:Salaries					35,025
	new fixed cost					850,025
	BEP(dollars) = 850025/11*20
		1545500	answer
3)					Variable	Fixed
	cost of goods sold				481,000	481,000
	Selling expense				91,000	419,000
	Administrative expense				58,000	90,000
	total				630,000	990,000
	contribution = 1,500,000-630000
		870,000
	contribution margin ratio =870000/1500000
			58.0000%
	Break even            =		990000/58%
			1706897	answer
	Alternative 1