Problem 6-1A Ø Your an wer is partially correct. Try again. Midlands Inc, had a
ID: 2406805 • Letter: P
Question
Problem 6-1A Ø Your an wer is partially correct. Try again. 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 showed the following results from selling 79,000 units of product: net sales $1,975,000; total costs and expenses $1,997,500, and net loss $22,500. Costs and expen?es consisted of the following. Total Variable Fixed Cost of goods sold Selling expenses Administrative expenses $1,337,500 514,000 146,000 $1,997,500 5840,500 91000 56,000 5987,500 $497,000 423,000 90,000 $1,010,000 1. Increase unit selling price 20% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling S 199,000 to total salaries of $43,000 plus a 5% commission on net sales. 3. Purchase newi high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50 (a) Compute the break-evan point in dollars for 2016. (Round contribution margin ratio to 2 decimal places e.g. 0.25 and final ansver to 0 decimal places, o.g. 2,510.) Break-even point 202000 (b) Compute the break-even point in dollars under each of the alternative courses of action for 2017. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.) 1. Increase selling price 2. Change compensation 3. Purchase machinery Alternative 1 T Which course of action do you recommend?Explanation / Answer
Sales: 1975000 Less; variable cost 987500 Contribution margin 987500 Contribution margin ratio: 987500 / 1975000 *100 = 50% Total fixed cost: $ 1010,000 Break even point in $: Total Fixed cost/ CM ratio 1010,000 /50% = $ 2020,000 Req b: Option-1 Revised Sales: 2370000 Less: Variable Cost 987500 Contribuition 1382500 CM ratio: 1382500/2370000*100 = 58.33% Break even point in $: Total Fixed cost/ CM ratio 1010000 / 58.33% = $ 1731528 Option-2 Revised CM ratio = 50-5 = 45% Revised Fixed cost: 1010000-199000+43000 =854000 Break even point in $: Total Fixed cost/ CM ratio 854000/45% = $1897,778 Option-3 Revised Variable cost: 56000+91000+50% of 1337500 =815750 Revised Fixed cost =1997500-815750 = 1181750 Sales: 1975000 Contribution = 1975000-815750 = 1159250 CM ratio: Contribution / Sales *100 1159250 /1975000*100 = 58.70% Break even point in $: Total Fixed cost/ CM ratio 1181750 /58.70% = 2013203 Option-1 is better