Question

The condensed income statement for the Blossom and Paul partnership for 2020 is as follows. Blossom and Paul Company Income Statement For the Year Ended December 31, 2020 Sales (270,000 units) $1,350,000 Cost of goods sold 864,000 Gross profit 486,000 Operating expenses Selling $315,000 Administrative 175,500 490,500 Net loss $(4,500 ) 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. (Round intermediate calculations to 2 decimal places, e.g. 15.25 and final answers to 0 decimal places, e.g. 2,520.)

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 $0.25 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. (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.)

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 $0.25, 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. (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.)

4. Which plan should be accepted?

Paul's Plan or Blossom's plan?

Answer 1

Requirement 1:

75% of cogs is variable and 25% is Fixed

42 % selling and 40% administration expenses is variable and 58 and 60% is fixed 4

(Amount is $)

Particulars	Total	Variable	Fixed	Total cost per unit	Variable cost per unit
Sales	1,350,000			5
Cost of goods sold	864,000	648,000`	216,000	3.2	2.4
Selling expenses	315,000	132,300	182,700	1.17	0.49
Administration expenses	175,500	70,200	105,300	0.65	026
Total	1,354,500	850,500	504,000	5.02	3.15

Computation of Break-even sales unit:

Break-even units = Fixed Cost / Variable cost per unit

= $504,000/ ($5-$3.15)

= $ 504,000 /1.85

= 272,432.43 units or 272,432

Computation of break-even in sales

Break-even in sales = break-even in units * sale price

= 272,432 * $5

= 1,362,160

Requirement 2:

Computation Of Break-even when sales increase by 25%:

Given that:

Selling price is increase by $5.25 and improved spending $0.25 more

Particulars	Amount
Variable cost ( $3.15+$0.25)	$3.4
Sales volume (270,000 * 125%)	337,500 units
Total sales (337,500 * $5.25)	1,881,875

Computation of net income :

Contribution per unit = 5.25 - 3.4

= 1.85

Net income = Contribution -Fixed cost

= (337,500 * 1.85) - $504,000

= $624,375-504,000

= 120,375

Computation of Break-even units:

Break-even sales = Fixed cost / contribution per unit

= $504,000/1.85

= 272,432.4324 or 272,432 units

Break even in sales = sale price * Break-even in units

= $5.25 * 272.432

= 1,430,268

Requirement 3:

Computation of change in figures

Particulars	Amount ($)
New Variable cost (2.4 +0.59+ 0.26)	$3.25
New selling price ( $5-0.25)	4.75
New fixed cost (504,000 + $40,000)	544,000
New selling units (270,000 + 60%)	432,000
New contribution (4.75-3.25)	1.5

Computation of net profit

Net profit = COntribution margin - Fixed cost

= (432,000 * 1.5) - 544,000

= 4,000

Computation of break-even units:

Break even units = Fixed cost / Contribution per unit

= $544,000/1.5

= 362,666.6666 or 362,667 units

Break-even sales = Break-even units * Selling price

= 362,667 * 4.75

= 1,722,668.25\

Requirement D

Blossom's Plan should be Accepted because its provide higher amount of contribution margin per unit as compared to Paul's plan i.e. $0.10 (3.25-3.15)

and also The Blossom's Plan have lower Break-even as compared to Paul's Plan.

that is 90,235 units (272,432-362667)