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In: Accounting

Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated...

Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 525,500 units of product: sales $2,627,500, total costs and expenses $2,732,600, and net loss $105,100. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $2,249,140 $1,671,090 $578,050 Selling expenses 262,750 96,692 166,058 Administrative expenses 220,710 71,468 149,242 $2,732,600 $1,839,250 $893,350 Management is considering the following independent alternatives for 2018. 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 $157,650 to total salaries of $63,060 plus a 6% commission on sales. (a) Compute the break-even point in dollars for 2017. (Round final answer to 0 decimal places, e.g. 1,225.) Break-even point $Entry field with incorrect answer now contains modified data (b) Compute the contribution margin under each of the alternative courses of action. (Round final answer to 0 decimal places, e.g. 1,225.) Contribution margin for alternative 1 Entry field with incorrect answer % Contribution margin for alternative 2 Entry field with incorrect answer % Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, e.g. 1,225.) Break-even point for alternative 1 $Entry field with incorrect answer Break-even point for alternative 2 $Entry field with incorrect answer Which course of action do you recommend? Entry field with incorrect answer

Solutions

Expert Solution

Tanek Corp

  1. Computation of break-even point in dollars for 2017:

Break-even point in dollars = fixed cost/contribution margin ratio

Contribution margin ratio = contribution margin/net sales

Contribution margin = net sales – variable cost

Net sales = $2,627,500; Selling price per unit = $2,627,500/525,500 = $5 per unit

Total variable costs = $1,839,250

Contribution margin = $2,627,500 – $1,839,250 = $788,250

Contribution margin ratio = 788,250/2,627,500 = 30%

Total fixed cost = $893,350

Break-even point in dollar sales = $2,977,783

Hence, the break-even point in dollar sales for 2017 = $2,977,783

  1. Computation of break-even point for each independent situation –
  1. Increase unit selling price by 25% -

Actual unit selling price = $5per unit

Increase by 25% = 5+25% of 5 = $6.25

Hence net sales =525,500 = $3,284,375

Break-even point in dollars = fixed cost/contribution margin ratio

Contribution margin ratio = contribution margin/net sales

Contribution margin = net sales – variable cost

Net sales = $3,284,375

Total variable costs = $1,839,250

Contribution margin = $3,284,375 - 1,839,250 = $1,445,125

Contribution margin ratio = 44%

Total fixed cost = $893,350

Break-even point in dollar sales = $893,350/44% = $2,030,341

Hence, the break-even point in dollar sales when sales price is increased by 25% is $2,030,341

  1. Change compensation of sales persons from fixed annual salaries of $157,650 to total salaries of $63,060 + a 6% commission on net sales:

The effectof this change is as follows,

Change in Fixed expenses = $893,350 - $157,650 + $63,060

Fixed expenses = $798,760

Variable expenses = $1,839,250 + 6% of commission on sales

Variable expenses = 1,839,250 + 6% of $2,627,500 = $157,650 +1,839,250

Variable expenses = $1,996,900.

Break-even point in dollars = fixed cost/contribution margin ratio

Contribution margin ratio = contribution margin/net sales

Contribution margin = net sales – variable cost

Net sales = $2,627,500

Total variable costs = $1,996,900

Contribution margin = 2,627,500- $1,996,900 = $630,600

Contribution margin ratio = 630,600/2,627,500 = 24%

Total fixed cost = $798,760

Break-even point in dollar sales = $798,760/24% = $3,328,167

Hence, the revised break-even point = $3,328,167

Break-even point

1

Increase selling price

$2,030,341

2

Change compensation

$3,328,167

Recommendation

Increase Selling Price

Recommendation is to choose the first action – increase selling price.

Explanation: The break-even in dollar sales is less for option one. A lower break-even point indicates that the company can start making profit at lower sales volume.


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