Question

The condensed budgeted income statement for the Phan and Nguyen partnership for 2020 is as follows:

PHAN AND NGUYEN LLP Income Statement Year Ending December 31, 2020
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 behaviour analysis indicates that 75% of the cost of goods sold is variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable. (Use the CVP income statement format in calculating profits.)

Calculate the break-even point in total sales dollars and in units for 2020. (Round contribution margin per unit to 1.25, contribution margin ratio to 1 decimal place, e.g. 15.2% and final answers to 0 decimal places, e.g. 5,275.)

Break-even point in sales		$
Break-even point in units

Nguyen was a marketing major in university. He believes that the sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Phan’s: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling expenses by $40,000. Nguyen quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made.

Calculate Nguyen’s break-even point in dollars and units. (Round contribution margin per unit and contribution margin ratio to 2 decimal places, e.g. 15.25 or 15.25% and final answers to 0 decimal places, e.g. 5,275.)

Break-even point in sales		$
Break-even point in units

Determine which plan should be accepted.

Phan’s plan,Nguyen's plan, Both plans or None of the plans should be accepted.

Answer 1

Contribution Margin Statement

		TOTAL	PER UNIT
SALES(240,000 units)		$ 1,200,000	5
VARIABLE EXPENSES
COST OF GOODS SOLD (75%)	$600,000
SELLING (42%)	$117,600
ADMINISTRATIVE (40%)	$60,000
TOTAL VARIABLE EXPENSES		$ 777,600	3.24
CONTRIBUTION MARGIN		$ 422,400	1.76
FIXED EXPENSES
COST OF GOODS SOLD	200,000
SELLING	162,400
ADMINISTRATIVE	90,000
TOTAL FIXED EXPENSES		$ 452,400
NET LOSS		$ (30,000)

BREAK-EVEN POINT IN UNITS= TOTAL FIXED COST/CM PER UNIT

= 452,400/1.76

= 257,045 UNITS

BREAK-EVEN POINT IN DOLLARS= TOTAL FIXED COST/ CM RATIO

= 452,400/35.2%

= 1,285,227

CM RATIO= (SALES-VARIABLE)*100/SALES

= (5-3.24)*100/5=35.2%

CM STATEMENT

	TOTAL	PER UNIT
SALES (384,000 UNITS)	1,824,000	4.75
VARIABLE EXPENSES	1,282,560	3.34
CONTRIBUTION MARGIN	541,440	1.41
FIXED COST	492,400
INCOME	49,040

BREAK-EVEN POINT IN UNITS= FIXED COST/CM PER UNIT

= 492,400/1.41

= 349,220 UNITS

BREAK-EVEN PONTS IN RUPEES= FIXED COST/CM RATIO

= 492,400/29.7%

=$ 1,657,912

OPTION B SHOULD BE ACCEPTED.