In: Accounting
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 79,000 units of product: net sales $1,580,000; total costs and expenses $1,637,040; and net loss $57,040. Costs and expenses consisted of the following.
Total | Variable | Fixed | |
Cost of goods sold | 972000 | 486000 | 486000 |
Selling expenses | 517040 | 90000 | 427040 |
Admin expenses | 148000 | 56000 | 92000 |
Total | 1637040 | 632000 | 1005040 |
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 $203,000 to total salaries of $36,985 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 = |
(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.)
1. Increase selling price =
2. Change compensation =
3. Purchase machinery =
Which course of action do you recommend?