Midlands Inc. had a bad year in 2016. For the first time in its history, it oper

Question

Midlands Inc. had a bad year in 2016. For the first time in its history, it operated at a loss. The company's income statement s following results from selling 77,000 units of product: net sales $1,540,000; total costs and expenses $1,631,000; and net loss $91,000. the Total Variable Fixed Cost of goods sold Selling expenses $494,000 428,000 93,000 $1,015,000 $964,000 $470,000 90,000 S18,00056,000 149,000 $1,631,000 $616,000 Management is considering the following independent alternatives for 2017. 1. Increase unit selling price 20% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $198,000 to total salaries of $45,000 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 2017. (Round contribution margin ratio to 2 decimal places e.g. 0.25 and final answer to 0 decimal places, e.g. 2,510.) point 1691667 (b) C decimal places e.g. o.2512 and final answers to o decimal places, e.g. 2,510.) Break-even point 1522500 2. Change compensation 1567273 3. Purchase machinery 693661

Explanation / Answer

Answer a. Sales                          1,540,000 Less: Variable Expenses Cost of Goods Sold                             470,000 Selling exp.                               90,000 Admn. Exp.                               56,000                              616,000 Contribution                              924,000 Contribution Margin Ratio 60% (Contribution / Sales) Fixed Cost Cost of goods Sold                             494,000 Selling exp.                             428,000 Admn. Exp.                               93,000 Total Fixed Costs                         1,015,000 Break Even Point = Fixed Cost / Contribution Margin Ratio Break Even Point = $1,015,000 / 60% Break Even Point = $1,691,666.67 or say $1,691,667 (Approx.) Answer b. Alternatives 1 2 3 Sales                         1,848,000                          1,540,000                             1,540,000 (1,540,000 X 1.20) Variable Costs Cost of Goods Sold                             470,000                              470,000                                482,000 (964,000 X 50%) Selling exp.                               90,000                              167,000                                   90,000 $90,000 + ($1,540,000 X 5%) Admn. Exp.                               56,000                                56,000                                   56,000 Total Variable Expenses                             616,000                              693,000                                628,000 Contribution (B)                         1,232,000                              847,000                                912,000 Contribution Margin Ratio 66.67% 55.00% 59.22% (Contribution / Sales) Fixed Costs Cost of goods Sold                             494,000                              494,000                                482,000 (964,000 X 50%) Selling exp.                             428,000                              275,000                                428,000 ($428,000 - $198,000 + $45,000)   Admn. Exp.                               93,000                                93,000                                   93,000 Total Fixed Costs                         1,015,000                              862,000                             1,003,000 Break Even Point                         1,522,500                          1,567,273                             1,693,662 (Fixed Cost / Contribution Margin Ratio) (1,015,000 / 66.67%) ($862,000 / 55%) ($1,003,000 / 59.22%) Alternative 1. is Best due to following Reasons: 1. BEP is the lowest. 2. In Alternative 1, the company will earn profit of $1,015,000

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