Question

Midlands Inc. had a bad year in 2016. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 79,000 units of product: net sales $1,975,000; total costs and expenses $1,805,000; and net loss $170,000. Costs and expenses consisted of the following.

		Total		Variable		Fixed
Cost of goods sold		$1,148,000		$645,000		$503,000
Selling expenses		510,000		90,000		420,000
Administrative expenses		147,000		55,000		92,000
		$1,805,000		$790,000		$1,015,000

Management is considering the following independent alternatives for 2017.

1.		Increase unit selling price 30% with no change in costs and expenses.
2.		Change the compensation of salespersons from fixed annual salaries totaling $205,000 to total salaries of $36,000 plus a 5% commission on net sales.
3.		Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50. COMPUTE THE BREAK-EVEN POINT IN DOLLARS UNDER EACH OF THE ALTERNATIVE COURSES OF ACTION FOR 2017. I don't care about showing work at this point, just give answers ASAP please.

Answer 1

Solution 1:

Current selling price = $1,975,000 / 79000 = $25 per unit

Current variable cost per unit = $790,000 / 79000 = $10 per unit

Existing contribution margin per unit = $25 - $10 = $15 per unit

Existing fixed cost = $1,015,000

If selling price will be increase by 30% then revised selling price = $25*130% = $32.50

Revised contribution per unit = $32.50 - $10 = $22.50

New contribution margin ratio = $22.50 / $32.50 = 69.23%

Breakeven point in dollar = $1,015,000 / 69.23% = $1,466,127

Solution 2:

Due to change in compensation of sales person from fixed annual salaries totalling $205,000 to total salaries of $36,000 plus a 5% commission on net sales, fixed cost will decrease by $169,000 ( $205,000 - $36,000) and variable cost will increase by $1.25 ($25*5%) per unit

New variable cost per unit = $10 + $1.25 = $11.25

New Fixed cost = $1,015,000 - $169,000 = $846,000

New Contribution margin per unit = $25 - $11.25 = $13.75

New contribution margin ratio = $13.75 / $25 = 55%

Breakeven point in sales dollar = $846,000 / 55% = $1,538,182

Solution 3:

New variable cost of good sold due to high tech machinery = $1,148,000*50% = $574,000

New fixed cost of goods sold = $1,148,000*50% = $574,000

New total variable cost = $574,000 + $90,000 + $55,000 = $719,000

New Total fixed cost = $574,000 + $420,000 + $92,000 = $1,086,000

New contribution = $1,975,000 - $719,000 = $1,256,000

New contribution margin ratio = $1,256,000 / $1,975,000 = 63.59493%

Breakeven sales in dollar = Fixed cost / contribution margin ratio = $1,086,000 / 63.59493% = $1,707,683