Question

The condensed income statement for the Oriole and Paul partnership for 2020 is as follows.

Oriole and Paul Company Income Statement For the Year Ended December 31, 2020
Sales (300,000 units)				$1,500,000
Cost of goods sold				960,000
Gross profit				540,000
Operating expenses
Selling		$350,000
Administrative		232,500
				582,500
Net loss				$(42,500	)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.

Oriole 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. Oriole estimates that sales volume will increase by 25%. What effect would Oriole’s plan have on the profits and the break-even point in dollars of the partnership? (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.)

		Amount		Effect
Profit		$		DecreaseIncrease
Break-even point		$		DecreaseIncrease

Answer 1

	Present	Proposed
Sales	$   1,500,000	$   1,968,750
Variable Expenses
Cost of Goods Sold	$      720,000	$      993,750
Selling Expenses	$      147,000	$      171,500
Administrative Expenses	$         93,000	$      108,500
Total Variable Expenses	$      960,000	$   1,273,750
Contribution Margin	$      540,000	$      695,000
Fixed Expenses
Cost of Goods Sold	$      240,000	$      240,000
Selling Expenses	$      203,000	$      203,000
Administrative Expenses	$      139,500	$      139,500
Total Fixed Expenses	$      582,500	$      582,500
Profit (Loss)	$      (42,500)	$      112,500	$      155,000	Increase
Contribution Margin Ratio	36.00%	35.30%
Break Even point	$   1,618,056	$   1,650,142	$        32,086	Increase

Break Even Point = Fixed Costs / Contribution Margin Ratio

Increase in Break even point can alternatively be $32012 due to rounding off error.