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 80,000 units of product: net sales $1,600,000; total costs and expenses $1,824,800; and net loss $224,800. Costs and expenses consisted of the following.

		Total		Variable		Fixed
Cost of goods sold		$1,160,000		$652,000		$508,000
Selling expenses		515,800		91,000		424,800
Administrative expenses		149,000		57,000		92,000
		$1,824,800		$800,000		$1,024,800

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 $195,000 to total salaries of $41,985 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

$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 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		$Enter a dollar amount
2.		Change compensation		$Enter a dollar amount
3.		Purchase machinery		$Enter a dollar amount

Answer 1

SOLUTION

A. Selling cost per unit = $1,600,000 / 80,000 units = $20

Variable cost per unit = $800,000 / 80,000 units = $10

Contribution margin per unit = Sales per unit - variable expense per unit

= $20 - $10 = $10

Contribution margin ratio = contribution margin per unit / sales per unit

= $10 / $20 = 50%

Break even point = Fixed cost / contribution margin ratio

= $1,024,800 / 50% = $2,049,600

B. 1. per unit sale increases by 25%

New sale price = $20 + ($20*25%) = $25

New contribution margin = $25 - $10 = $15

Contribution margin ratio = $15 / $25 = 60%

Break even point = Fixed cost / contribution margin ratio

= $1,024,800 / 60% = $$1,708,000

2. Sales price per unit = $20

Variable cost per unit = $10 + ($20*5%) = $10 + 1 = $11.New contribution margin = $20 - $11 = $9

Contribution margin ratio = $9 / $20 = 45%

Fixed cost = $1,024,800 - $195,000 + $41,985 = $871,785

Break even point = Fixed cost / contribution margin ratio

= $871,785 / 45% = $1,937,300

3. Fixed cost = $1,024,800 + 580,000 - 508,000 = $1,096,800

Variable cost per unit = ($580,000 + $91000 + $57,000)/ 80,000 = $9.1

Contribution margin = $20-$9.1 = $10.90

Contribution margin ratio = $10.90 / $20 = 54.50%

Break even point = $1,096,800 / 54.50% = $2,012,477

So, the 1st alternative is the best .