Question

Go to the P22-3A problem in your text. See the “Do it” example for information on break even analysis (also found in the Digital Book under Course Resources).

Compute the breakeven point for fiscal year 2017.

Compute the breakeven point in dollars under each of the alternative courses of action.

What course of action do you recommend and why?

P22-3A Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it oper- ated at a loss. The company’s income statement showed the following results from selling 500,000 units of product: sales $2,500,000, total costs and expenses $2,600,000, and net loss $100,000. Costs and expenses consisted of the amounts shown on page 999. Cost of goods sold Selling expenses Administrative expenses Total $2,140,000 250,000 210,000 $2,600,000 Variable $1,590,000 92,000 68,000 $1,750,000 Fixed $550,000 158,000 142,000 $850,000 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 $150,000 to total salaries of $60,000 plus a 5% commission on sales.

a) Compute the break-even point in dollars for 2017. (b) Compute the break-even point in dollars under each of the alternative courses of action. (Round all ratios to nearest full percent.) Which course of action do you recommend?

Answer 1

a. Breakeven point for fiscal year 2017.

BEP = Fixed Cost / Contribution Margin Ratio

Contribution margin = Sales - Variable Costs = $2500000 - $1750000 = $750000

Contribution margin Ratio = Contribution Margin / Sales = $750000 / $2500000 = 30%

BEP = Fixed Cost / Contribution Margin Ratio

BEP for FY 2017 = $850000 / 30% = $2833333

b. BEP when SP increases by 20%

BEP = Fixed Cost / Contribution Margin Ratio

Contribution margin = Sales - Variable Costs = $2500000 * 1.20 - $1750000 = $1250000

Contribution margin Ratio = Contribution Margin / Sales = $1250000 / $3000000 = 41.67%

BEP = Fixed Cost / Contribution Margin Ratio

BEP When SP increases by 20%= $850000 / 41.67% = $2040000

c. BEP when Salaries are changed

BEP = Fixed Cost / Contribution Margin Ratio

Contribution margin = Sales - Variable Costs = $2500000 - $1750000 - $125000 = $625000

Contribution margin Ratio = Contribution Margin / Sales = $625000 / $2500000 = 25%

BEP = Fixed Cost / Contribution Margin Ratio

BEP When Salaries changes= $760000 / 25% = $3040000

It is Recommended to opt for increase in Sp price by 20% as it will result in Less BEP of $2040000