Question

The condensed income statement for the Blossom and Paul partnership for 2020 is as follows.

Sales (240,000 units)				$1,200,000
Cost of goods sold				800,000
Gross profit				400,000
Operating expenses
Selling		$280,000
Administrative		156,000
				436,000
Net loss				$(36,000	)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.

1) Compute the break-even point in total sales dollars for 2020.

2) Blossom has proposed a plan to get the partnership “out of the red” and improve its profitability. She feels that the quality of the product could be substantially improved by spending $0.30 more per unit on better raw materials. The selling price per unit could be increased to only $5.25 because of competitive pressures. Blossom estimates that sales volume will increase by 25%. Compute the net income under Blossom's proposal and the break-even point in dollars

3) Paul was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Blossom’s: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.23, and (3) increase fixed selling expenses by $40,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. Compute the net income under Paul’s proposal and the break-even point in dollars.

Answer 1

Answer with working is given below