Question

Midlands Inc. had a bad year in 2019. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 75,000 units of product: net sales $1,500,000; total costs and expenses $1,780,200; and net loss $280,200. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,106,000 $598,000 $508,000 Selling expenses 522,200 95,000 427,200 Administrative expenses 152,000 57,000 95,000 $1,780,200 $750,000 $1,030,200 Management is considering the following independent alternatives for 2020. 1. Increase unit selling price 25% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $40,010 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. (a) Compute the break-even point in dollars for 2019.

Answer 1

Answer:

(a) the break-even point in dollars for 2019 = $2,060,400.00

Explanation:

Break Even Point in Dollars = Fixed Cost/Contribution margin

Contribution margin = (Sales - Variable Cost) as a portion of sales.

Total variable cost in 2019 = $598,000 + $95,000 + $57,000 = $750,000

Total sales for 2019 = $1,500,000

Contribution = $1,500,000 - $750,000 = $750,000

As a portion of sales = $750,000/$1,500,000 = 50%

Total Fixed Cost = $1,030,200

Therefore Break Even Point in Dollars for the year 2019 = $1,030,200/50% = $2,060,400