Question

Midlands Inc. had a bad year in 2016. 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 $ 1,805,000; and net loss $ -170,000. Costs and expenses consisted of the following.

		Total		Variable		Fixed
Cost of goods sold		$ 1,148,000		$ 645,000		$ 503,000
Selling expenses		510,000		90,000		420,000
Administrative expenses		147,000		55,000		92,000
		$ 1,805,000		$ 790,000		$ 1,015,000

Management is considering the following independent alternatives for 2017.

1.		Increase unit selling price  30% with no change in costs and expenses.
2.		Change the compensation of salespersons from fixed annual salaries totaling $ 205,000 to total salaries of $ 36,000 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 2017. (Round contribution margin ratio to 2 decimal places e.g. 0.25 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. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

				Break-even point
1.		Increase selling price		$ enter a dollar amount rounded to 0 decimal places
2.		Change compensation		$ enter a dollar amount rounded to 0 decimal places
3.		Purchase machinery		$ enter a dollar amount rounded to 0 decimal places

Which course of action do you recommend?  select a course of action using the break-even analysisselect a course of action using the break-even analysis  Alternative 1Alternative 2Alternative 3

Answer 1

		A		Total	PU
			Sales	1975000	25.00	a
			Less: Variable Expense	790000	10.00
			Contribution Margin	1185000	15.00	b
			Contribution Margin Ratio	60.00%	60.00%	b/a
			Fixed Costs	1015000
			Contribution Margin Ratio	60%
			BEP-Dollars	1691667
		B
		1	Increase in SP:
			Current Sale Price	25.00
			Revised Sales Price	32.50	25*130%
			Less: Variable Expense	10.00
			Contribution Margin	22.50
			Contribution Margin Ratio	69.00%
			Fixed Costs	1015000
			Contribution Margin Ratio	69%
			BEP-Dollars	1471014
		2	Sales	25.00
			Less: Variable Expense	11.25	(10+(25*5%))
			Contribution Margin	13.75
			Contribution Margin Ratio	55.00%
			Fixed Costs	1220000	1015000+205000
			Contribution Margin Ratio	55%
			BEP-Dollars	2218182
		3		PU
			Sales	25.00
			Less: Variable Expense	12.50
			Contribution Margin	12.50
			Contribution Margin Ratio	50.00%
			Fixed Costs	902500
			Contribution Margin Ratio	50%
			BEP-Dollars	1805000
		S.No	Proposal	BEP
		1	Increase in SP	1471014
		2	Change Compensation	2218182
		3	Purchase Machinery	1805000
			Since the BEP above is lowest in Incrase in SP, Company should opt Alternative 1