Total Variable Fixed 120,000 45,000 75,000 $1,740,000 $900,000 $840,000 Manageme

Question

Total

Variable

Fixed

120,000

45,000

75,000

$1,740,000

$900,000

$840,000

Management is considering the following independent alternativesfor 2009.

Which alternative is the recommended course of action?

Cruz Manufacturing had a bad year in 2008.For the first time in its history it operated at a loss. Thecompany's income statement showed the following results fromselling 80,000 units of product: Net sales $1,600,000; total costsand expenses $1,740,000; and net loss $140,000. Costs and expensesconsisted of the following.

Total

Variable

Fixed

Cost of goods sold $1,200,000 $780,000 $420,000 Selling expenses 420,000 75,000 345,000 Administrative expenses

120,000

45,000

75,000

$1,740,000

$900,000

$840,000

Management is considering the following independent alternativesfor 2009.

1. Increase unit selling price 25% with no change in costs andexpenses.
2. Change the compensation of salespersons from fixed annualsalaries totaling $200,000 to total salaries of $40,000 plus a 5%commission on net sales.
3. Purchase new high-tech factory machinery that will change theproportion between variable and fixed cost of goods sold to50:50.

Explanation / Answer

1. Increase selling price ================== Unit selling price after 25% hike       = $1,600,000 *1.25 / 80,000                  $25.00 Less : Unit Variable Cost                  = $900,000 / 80,000                              $11.25                                                                                                                   ------------    Contribution Margin                                                                                       $13.75    BEP (Units) = $840,000/$13.75                                                                                                                   ========                     =   61,091 units   1. Increase selling price                BEP dolloars = $61,091 x 25   =   1,527,275 Check = $1,527,275 - ($11.25 x 61,091) - $840,000 = $1,527,275 - $687,274 - $840,000 = 1
____________________________________________________________________________________________ 2. Change Compensation ===================          Unit Selling Price                                                                                 $20.00 Less : Variable Cost ( 11.75 + 5% of $20)                                                   $12.75
                                                                                                                  ---------
   Contribution Margin                                                                                   $7.25
                                                                                                                  ======              Revised Fixed Cost ($840,000 - $200,000 + $40,000)                        $680,000                                                                                     BEP ( units)          $680,000 / $7.25      =   93,793 units 2. Change Compensation ===================          Unit Selling Price                                                                                 $20.00 Less : Variable Cost ( 11.75 + 5% of $20)                                                   $12.75
                                                                                                                  ---------
   Contribution Margin                                                                                   $7.25
                                                                                                                  ======              Revised Fixed Cost ($840,000 - $200,000 + $40,000)                        $680,000                                                                                     BEP ( units)          $680,000 / $7.25      =   93,793 units 2. Change Compensation BEP (Dollars)   = 93,793 x 20 = $1,875,860 Check = $1,875,860 - ($12.75 x 93,793) - $680,000 = $1,875,860 - $1,195,860 - $680,000 = 0 ____________________________________________________________________________________________ Check = $1,875,860 - ($12.75 x 93,793) - $680,000 = $1,875,860 - $1,195,860 - $680,000 = 0 3. Purchase Machinery ================== 3. Purchase Machinery ================== 3. Purchase Machinery ==================

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