Question

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

Answer 1

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