Question

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

Answer 1

Tanek Corp

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 Computation of break-even point for each independent situation – 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 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.