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 $1,900,000; and net loss $400,000. Costs and expenses consisted of the following.Total Variable FixedCost of goods sold $1,240,000 $755,000 $489,000Selling expenses 515,000 90,000 425,000Administrative expenses 145,000 55,000 90,000$1,900,000 $900,000 $1,000,000Management is considering the following independent alternatives for 2020.1. Increase unit selling price 20% with no change in costs and expenses.2. Change the compensation of salespersons from fixed annual salaries totaling $195,000 to total salaries of $35,000 plus a 5% commission on set sales.3. Purchase new high-tech factory machinery that will change the proportion between the variable and fixed cost of goods sold to 50:50(a) Compute the break-even point in dollars for 2019.(b) Compute the break-even point in dollars under each of the alternative courses of action for 2020.Break-even point1. Increase selling price $_____2. Change compensation $_____3. Purchase machinery $_____

Answer 1

Answer:

A) 2,000,000

B) 2,400,000

C) 2,316,327

Explanation:

a) we sale for 1,500,000 currently

if we increase by 20% then:

1,500,000 x 1.2 = 1,800,000

Contribution margin

1,800,000 - 755,000 - 90,000 - 55,000 = 900,000

Then, we solve for ratio

900,000 / 1,800,000 = 0.5

Now BEP:

fixed cost / CMR

485,000 + 425,000 + 90,000 = 1,000,000

1,000,000 / 0.50 = 2,000,000

b) commision variable expense

1,500,000 x 0.05 = 75,000

variables will be 900,000 + 75,000 = 975,000

then fixed 1,000,000 - 195,000 + 35,000 salaries = 840,000

CMR (1,500,000 - 975,000) / 1,500,000 = 0.35

840,000 / 0.35 = 2,400,000

c)

1,240,000 x 0.5 = 620,000

decrease in variable: 755,000 - 620,000 = 135,000

Increase in fixed 135,000

variable cost: 900,000 - 135,000 = 765,000

fixed cost: 1,000,000 + 135,000 = 1,135,000

CMR: (1,500,000 - 765,000) / 1,500,000 = 0.49

break even point

1,135,000 / 0.49 = 2,316,327