Question

In: Accounting

Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated...

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 500,500 units of product: sales $2,502,500, total costs and expenses $2,602,600, and net loss $100,100. Costs and expenses consisted of the amounts shown below.

Total

Variable

Fixed

Cost of goods sold $2,142,140 $1,591,590 $550,550
Selling expenses 250,250 92,092 158,158
Administrative expenses 210,210 68,068 142,142
$2,602,600 $1,751,750 $850,850


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 $150,150 to total salaries of $60,060 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?                                                           Alternative 1Alternative 2

Solutions

Expert Solution

Answer :

(a) Computation of Break even point in dollar for 2017

Break even point in dollar = Fixed cost / contribution margin ratio

= $ 850850 / 30%

= $ 2836167

Working note -1

Contribution margin = Sales - Variable cost

= $ 2502500 - $ 1751750

= $ 750750

Contribution margin ratio = Contribution *100 / sales

= $ 750750 *100 / $ 2502500

= 30 %

(b)

Computation of contribution margin for Alternative -1

selling price per unit = $ 2502500 / 500500 = $ 5

New selling price = $ 5 + $ 5 *20 % = $ 6

Variable cost per unit = $ 3.50

Contribution per unit = $ 2.50

contribution margin for Alternative -1 = $ 2.50 *100 / $ 6 = 42 %

Computation of contribution margin for Alternative -2

Fixed salary of sales person = $ 150150

other Fixed cost = Total fixed cost - fixed salary of sales person

= $ 850850 - $ 150150 = $ 700700

New fixed salary = $ 60060

New total fixed cost = $ 700700 + $ 60060 = $ 760760

Sales per unit = $ 5

New variable cost = $ 3.50 + $ 5 *5% = $ 3.75

Contribution per unit = $ 5- $ 3.75 = $ 1.25

contribution margin for Alternative -2 = $ 1.25*100/ $ 5 = 25 %

(c) Break even point for alternative -1

= Total fixed cost / Contribution margin ratio

= $ 850850 / 42 % = $ 2025833 ( Approx)

Break even point for alternative -2

= Total fixed cost / Contribution margin ratio

= $ 760760 / 25 % = $ 3043040

Company should Choose  Alternative -1


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