Question

The condensed income statement for the Peri and Paul partnership for 2017 is as follows.

PERI AND PAUL COMPANY

Income Statement

For the Year Ended December 31, 2017

Sales (240,000 units)                                                      $1,200,000          

Cost of goods sold                                                            800,000                

Gross profit                                                        400,000                

Operating expenses                                                                      

Selling                   $280,000                                             

Administrative                  150,000                                                

430,000                

Net loss                                                $(30,000               )

A cost behavior analysis indicates that 70% of the cost of goods sold are variable, 43% of the selling expenses are variable, and 39% of the administrative expenses are variable.

(Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.)

Part (A)

Compute the break-even point in total sales dollars and in units for 2017. (Round intermediate calculations to 2 decimal places, e.g. 0.25 and final answers to 0 decimal places, e.g. 2,520.)

Break-even point in dollars                           $

Break-even point in units                              units

Part (B)

Peri 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. Peri estimates that sales volume will increase by 30%. What effect would Peri’s plan have on the profits and the break-even point in dollars of the partnership?

Amount                               Effect

Profit                     $

Break-even point                             $

(c)

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 Peri’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 61% if these changes were made. What effect would Paul’s plan have on the profits and the break-even point in dollars of the partnership?

Amount                               Effect

Profit                     $

Break-even point                             $

Answer 1

Break even point = fixed cost/ contribution per unit

=$275,100/2.67

=$103,034

Break even point in $ =$275,100

Fixed cost =

800,000* .30= 240,000

280,000* .57= 159,600

150,000* .61=. 91,500

Total. =$275,100

Contribution per unit=

$1200000-$(800,000*.7)/240,000

=$640000/240,000

=$2.67

2). New break even point

Fixed cost/new contribution per unit

=$275,100/2.67

=103034units

Profit = contribution* units sold-other cost

Contribution per unit=(2.67* 312000)

- fixed overhead =240,000

- fixed selling cost =159,600

-fixed admin cost. = 91,500

-variable selling cost =156,520

-variable admin cost. =6050

=$109,370 (profit)

3). statement of profit

Sales(240000*1.61(	386400*4.75	1,835,400
-variable cost	386400*2.33	900,312
Contribution		935,088
Fixed manufacturing cost		240,000
Gross profit		695,088
-variable admin cost	386400*.24	92,736
-fixed admin cost		91,500
Operating profit		510,852
-variable selling cost	386,400*.59	227,976
-fixed selling cost		199,600
Net Profit		83,276

Break even point

(240000+ 199600+91500)/2.42

=219,462units