Question

The condensed income statement for the Peri and Paul partnership for 2017 is as follows. PERI AND PAUL COMPANY Income Statement For the Year Ended December 31, 2017 Sales (240,000 units) $1,200,000 Cost of goods sold 800,000 Gross profit 400,000 Operating expenses Selling $280,000 Administrative 150,000 430,000 Net loss $(30,000 ) A cost behavior analysis indicates that 65% of the cost of goods sold are variable, 45% of the selling expenses are variable, and 44% of the administrative expenses are variable. (Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.) Collapse question part (a) Partially correct answer. Your answer is partially correct. Try again. Compute the break-even point in total sales dollars and in units for 2017. (Round intermediate calculations to 2 decimal places, e.g. 0.25 and final answers to 0 decimal places, e.g. 2,520.) Break-even point in dollars $Entry field with incorrect answer 1275860 Break-even point in units Entry field with correct answer 255172 units SHOW SOLUTION Attempts: 2 of 2 used Collapse question part (b) Peri has proposed a plan to get the partnership “out of the red” and improve its profitability. She feels that the quality of the product could be substantially improved by spending $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $5.25 because of competitive pressures. Peri estimates that sales volume will increase by 25%. What effect would Peri’s plan have on the profits and the break-even point in dollars of the partnership? Amount Effect Profit $ Break-even point $

Answer 1

Answer to Part a.

Break Even Point (in Units) = Fixed Cost / Contribution Margin per Unit
Sales = $1,200,000
Selling Price per Unit = 1,200,000 / 240,000 = $5

Calculation of Fixed Cost and Variable Cost:
Variable Component of Cost of Goods Sold = $800,000 * 65% = $520,000
Fixed Component of Cost of Goods Sold = $800,000 * 35% = $280,000

Variable Component of Selling Expenses = $280,000 * 45% = $126,000
Fixed Component of Selling Expenses = $280,000 * 55% = $154,000

Variable Component of Administrative Expenses = $150,000 * 44% = $66,000
Fixed Component of Administrative Expenses = $150,000 * 56% = $84,000

Contribution Margin per Unit = Selling price per Unit – Variable Cost Per unit

Contribution Margin per Unit = $5 - $2.98
Contribution Margin per Unit = $2.02

Break Even Point (in Units) = 518,000 / 2.02
Break Even Point (in Units) = 256,435.60 or 256,436 Units

Break Even Point (in Dollar Sales) = Break Even Point (in Units) * Selling price Per Unit
Break Even Point (in Dollar Sales) = 256,436 * $5
Break Even Point (in Dollar Sales) = $1,282,180

Answer to Part b.

Proposed Variable Cost = ($2.17 + $0.25) + $0.53 + $0.28 = $3.23
Proposed Selling Price per Unit = $5.25
Proposed Unit Sales = 240,000 * 1.25 = 300,000 Units

Break Even Point in Dollars = Fixed Cost / Contribution Margin Ratio
Contribution Margin Ratio = 3.23 / 5.25 * 100 = 61.52%
Break Even Point in Dollars = 518,000 / 0.6152
Break Even Point in Dollars = $842,003