Midlands Inc. had a bad year in 2016. For the first time in its history, it oper
ID: 2430919 • Letter: M
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 showed the following results from selling 78,000 units of product: net sales $2,340,000; total costs and expenses $2,185,000; and net loss $155,000. Costs and expenses consisted of the following.
Total
Variable
Fixed
Management is considering the following independent alternatives for 2017.
(a) Compute the break-even point in dollars for 2016. (Round contribution margin ratio to 2 decimal places e.g. 0.25 and final answer to 0 decimal places, e.g. 2,510.)
(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.)
Break-even point
Which course of action do you recommend?
Total
Variable
Fixed
Cost of goods sold $1,511,000 $1,018,000 $493,000 Selling expenses 521,000 94,000 427,000 Administrative expenses 153,000 58,000 95,000 $2,185,000 $1,170,000 $1,015,000Explanation / Answer
total per unit Sales 2,340,000 30 less :variable expense cost of goods sold 1,018,000 13.05128 selling expense 94,000 1.205128 administrative expense 58,000 0.74359 total variable expense 1,170,000 15 contribution margin 1,170,000 15 contribution margin = contribution/sales 1170,000/2,340,000 50% a) Break even point (dollars) = total fixed cost/contribution margin ratio 1,015,000/50% 2030000 answer b) 1) increase selling price 20% Selling price per unit (30*120%)= 36 less variable cost per unit 15 contribution margin per unit 21 Break even point = 1,015,000/21*36 1740000 answer 2) Change compensation selling price per unit 30 variable cost per unit 15 5% commission on sales (30*5%) 1.5 16.5 Contribution margin per unit 13.5 Fixed cost total fixed cost 1,015,000 less:Reduced -202,000 add:Salaries 40,000 new fixed cost 853,000 BEP(dollars) = 853000/13.5*30 1895556 answer 3) Variable Fixed cost of goods sold 755,500 755,500 Selling expense 94,000 427,000 Administrative expense 58,000 95,000 total 907,500 1,277,500 contribution = 2,340,000-907500 1432500 contribution margin ratio =1432500/2340000 61.2179% Break even = 1277500/61.2179% 2086806 answer Alternative 1