Question

In: Accounting

Midlands Inc. had a bad year in 2019. For the first time in its history, it...

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 $

Solutions

Expert Solution

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

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