Question

Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 75,800 units of product: Net sales $1,455,360; total costs and expenses $1,754,400; and net loss $299,040. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,206,500 $782,900 $423,600 Selling expenses 426,000 79,600 346,400 Administrative expenses 121,900 50,900 71,000 $1,754,400 $913,400 $841,000 Management is considering the following independent alternatives for 2014. 1. Increase unit selling price 28% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $198,500 to total salaries of $39,900 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.

I) Calculate the break even point for 2014.

II) Compute the break even point in dollars under each of the alternative courses of action.

A. Increasing selling price

B. Change in compensation

C. Purchase new machinery

Answer 1