Midlands Inc. had a bad year in 2016. For the first time in its history, it oper
ID: 2462718 • 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 77,000 units of product: net sales $2,310,000; total costs and expenses $2,180,000; and net loss $130,000. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,505,000 $1,003,000 $502,000 Selling expenses 522,000 92,000 430,000 Administrative expenses 153,000 60,000 93,000 $2,180,000 $1,155,000 $1,025,000 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 $201,000 to total salaries of $36,000 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 2016. (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 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 1. Increase selling price $ 2. Change compensation $ 3. Purchase machinery $
Explanation / Answer
Midlands Inc. All Amounts in $ Particulars Qty. Per Unit Value Bifurcation of Costs into Fixed and Variable Sales 77000 30 2310000 Variable Fixed Variable Expenses Cost of Goods Sold 77000 13.02597 1003000 Cost of Goods Sold 1003000 502000 Selling Expenses 77000 1.194805 92000 Selling Expenses 92000 430000 Admnistrative Expenses 77000 0.779221 60000 Administrative Expenses 60000 93000 Contribution Margin 77000 15 1155000 Fixed Costs 1025000 Net Income 130000 (a) The breakeven point in dollars Let the number of breakeven units sold be X Breakeven is a point where Sales = Costs Hence, 30X = 15X + 1,025,000 Thus, 15X = 1,025,000 or X = 1,025,000 / 15 = 68333 units In monetary terms, the breakeven point in dollars is equal to 15 X 68,333.33 + 1,025,000 = 2050000 $ (b) Breakeven points in dollars scenario wise Scenario I = Sales price increase by 20% or $ 36 per unit Let the number of units for breaking even be X Thus, 36X = 15X + 1.025.000 Hence, 21X = 1,025,000 or X = 1,025,000 / 21 = 48810 units In monetary terms, the breakeven point in dollars is equal to 15 X 48,809.52 + 1,025,000 = 1757143 $ Scenario 2 = Sales Commission The variable costs per unit which is currently $ 15 per unit will go up by 5% of $ 30 = $ 1.5 Hence, the revised variable costs will be $ 16.50 per unit Against this, the fixed costs of $ 1,025,000 reduce by $ 201,000 and increase by $ 36,000 Thus, the revised fixed costs are $ 860,000. Let us assume the units for breakeven as X Thus, 30X = 16.5X + 860,000 Hence, 13.5X = $ 860,000 or X = 860,000 / 13.5 = 63704 units In monetary terms, the breakeven point in dollars will be 16.5 X 63,703.7 + 860,000 = 1911111 $ Scenario 3 = Capital Machinery Purchase Total Variable + Fixed Costs = $ 1,155,000 + $ 1,025,000 = $ 2,180,000 After purchase of the new machinery Variable Costs = 50% = $ 1,090,000 or 14.15584 $ per unit Fixed Costs = 50% = $ 1,090,000 Let us assume the units for breakeven as X Thus, 30X = 14.15584X + 1,090,000 Hence, 15.84416X = 1,090,000 or X = 1,090,000 / 15.84416 = 68795 units In monetary terms, the breakeven point in dollars will be 15.84416 X 68,794.7 + 1,090,000 = 2179994 $