Problem 19-1A Midlands Inc. had a bad year in 2016. For the first time in its hi

Question

Problem 19-1A 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 expenses 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 $840,500 91,000 56,000 $987,500 $497,000 423,000 90,000 $1,010,000 Management is considering the following independent alternatives for 2017 I. Increase unit selling price 20% with no change in costs and expenses 2. Change the compensation of salespersons from fixed annual salaries totaling $199,000 to total salaries of $43,000 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.) Break-even point (b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.) Break-even point 1. Increase selling price 2. Change compensation 3. Purchase machinery Which course of action do you recommend? Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Sale price p.u = 1975000/79000 = 25

Contri per unit = 1975000-987500 = 987500/ 79000 = 12.5

Contri margin ration 12.5/25 = 50%

B.e.p = f.c/c.m.r = 1010000/12.5 = 80800 units

B.e.p in $ 1010000/50% = 2020000 $

B)

1) New s.p 25+20% = 30

Contribution p= (79000*30) - 987500 = 1382500

Contri p.u = 1382500/79000 = 17.5

Contri margin ratio = 17.5/30 = 58.33%

Fixed cost = 1010000

B.e.p = 1010000/58.33% = 1731528$

2)

Commission (variable) = 1975000*5% = 98750$

Variable cost = 987500+ 98750 = 1086250$

Fixed cost = 1010000-199000+43000 = 854000

Contribution = 1975000-1086250 = 888750$

Contri p.u 888750/79000 = 11.25

Contribu ratio = 11.25/25 = 45%

B.e.p = 854000/45% = 1897778$

3)

Total cost 1997500

Variable. 998750

Fixed. 998750 (50%)

Contri 1975000-998750 = 976250

Contri p.u. 976250/79000 = 12.36

Contribution ratio = 12.36/25 = 49.44%

B.e.p = 998750/49.44% = 2020125$

Recommendation

Increase in selling price as it result in lower b.e.p

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