Question
In: Accounting
Oriole Corp.’s sales slumped badly in 2020. For the first time in its history, it operated...
Oriole Corp.’s sales slumped badly in 2020. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 555,500 units of product: sales $ 2,777,500, total costs and expenses $ 2,869,875, and net loss $ 92,375. Costs and expenses consisted of the amounts shown below.
Total Variable Fixed
| Cost of goods sold | $ 2,358,815 | $ 1,905,365 | $ 453,450 | |||
| Selling expenses | 277,750 | 102,212 | 175,538 | |||
| Administrative expenses | 233,310 | 75,548 | 157,762 |
Management is considering the following independent alternatives for 2021.
| 1. | Increase unit selling price 25% with no change in costs, expenses, and sales volume. | |
| 2. | Change the compensation of salespersons from fixed annual salaries totaling $ 166,650 to total salaries of $ 66,660 plus a 5% commission on sales |
Compute the contribution margin under each of the alternative
courses of action.
| 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.
| Break-even point for alternative 1 |
$ |
|
| Break-even point for alternative 2 |
$ |
Which course of action do you
recommend? Alternative 1 or 2?
Solutions
Expert Solution
| Contribution margin ratio Alternative 1 | = | 40% | ||
| Contribution margin ratio Alternative 2 | = | 20% | ||
| Break-even point in dollars Alternative 1 | = | $ 19,66,875 | ||
| Break-even point in dollars Alternative 2 | = | $ 34,33,800 | ||
| Alternative 1 is recommended from above conclusions | ||||
| Workings: | ||||
| Alternative 1: | ||||
| Total | Variable cost | Fixed cost | ||
| Units sold | 5,55,500 | |||
| Sales Revenue ($2777500 X 1.25) | $ 34,71,875 | |||
| Cost of goods sold | $ 23,58,815 | $ 19,05,365 | $ 4,53,450 | |
| Selling expenses | $ 2,77,750 | $ 1,02,212 | $ 1,75,538 | |
| Administrative expenses | $ 2,33,310 | $ 75,548 | $ 1,57,762 | |
| Total expenses | $ 28,69,875 | $ 20,83,125 | $ 7,86,750 | |
| Contribution margin ($3471875 - $208315) | $ 13,88,750 | |||
| Total Fixed cost | $ 7,86,750 | |||
| Net Income (loss) | $ 6,02,000 | |||
| Contribution margin ratio | = | Contribution margin / Sales | ||
| = | $602000 / $3471875 | |||
| = | 40% | |||
| Break-even point in dollars | = | Fixed costs / Contribution margin ratio | ||
| = | $786750 / 40% | |||
| = | $ 19,66,875 | |||
| Alternative 2: | ||||
| Total | Variable cost | Fixed cost | ||
| Units sold | 5,55,500 | |||
| Sales Revenue | $ 27,77,500 | |||
| Cost of goods sold | $ 23,58,815 | $ 19,05,365 | $ 4,53,450 | |
| Selling expenses | $ 2,77,750 | $ 2,41,087 | $ 75,548 | |
| Administrative expenses | $ 2,33,310 | $ 75,548 | $ 1,57,762 | |
| Total expenses | $ 28,69,875 | $ 22,22,000 | $ 6,86,760 | |
| Contribution margin ($2777500 - $2222000) | $ 5,55,500 | |||
| Total Fixed cost | $ 6,86,760 | |||
| Net Income (loss) | $ -1,31,260 | |||
| Contribution margin ratio | = | Contribution margin / Sales | ||
| = | $555500 / $2777500 | |||
| = | 20% | |||
| Break-even point in dollars | = | Fixed costs / Contribution margin ratio | ||
| = | $686760 / 20% | |||
| = | $ 34,33,800 | |||
| Selling expenses | ||||
| Previous Fixed charges | = | $ 1,66,650 | ||
| Present Fixed charges | = | $ 66,660 | ||
| Reduction in Fixed charges | = | $ 99,990 | ||
| New Fixed charges ($175538 - $99990) | = | $ 75,548 | ||
| Variable charges | ||||
| Present Fixed charges | = | $ 1,02,212 | ||
| Add: 5% Sales Commission ($2777500 X 5%) | = | $ 1,38,875 | ||
| New Variable charges | = | $ 2,41,087 | ||
| Alternative 1 is recommended from above conclusions | ||||
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