Midlands Inc. had a bad year in 2016. For the first time in its history, it oper
ID: 2469941 • 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 80,000 units of product: net sales $2,400,000; total costs and expenses $2,225,000; and net loss $175,000. 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
Your answer is incorrect. Try again.Explanation / Answer
Answer (a).
Contribution Margin = Sales - Variable = 2,400,000 - 1,200,000 = 1,200,000
Contribution Margin Ratio = Contribution Margin / Net Sales = 1,200,000/2,400,000 = 0.50
Breakeven Point in Dollars = Fixed Cost / Contribution Margin Ratio
= 1,025,000/50% = $2,050,000
Answer (b). 1.
If we increase the selling price 25% with no change in costs and expenses,
Selling price in 2016 = 2,400,000/80,000 = 30
Selling price in 2017 = 1.25*30 = 37.5
Total Sales = 37.5*80,000 = 3,000,000
Cost and Expenses include $1,200,000 variable and $1,025,000 fixed cost.
Contribution Margin = Sales - Variable = 3,000,000 - 1,200,000 = 1,800,000
Contribution Margin Ratio = Contribution Margin / Net Sales = 1,800,000/3,000,000 = 0.60
Breakeven Point in Dollars = Fixed Cost / Contribution Margin Ratio
= 1,025,000/0.60 = $1,708,333.
Answer (b). 2.
Change the compensation of salespersons from fixed annual salaries totaling $195,000 to total salaries of $42,000 plus a 5% commission on net sales.
Cost and Expenses include $1,320,000 ($1,200,000+5% of Net Sales) variable and $872,000 ($1,025,000-195,000+42,000) fixed cost.
Contribution Margin = Sales - Variable = 2,400,000 - 1,320,000 = 1,080,000
Contribution Margin Ratio = Contribution Margin / Net Sales = 1,080,000/2,400,000 = 0.45
Breakeven Point in Dollars = Fixed Cost / Contribution Margin Ratio
= 872,000/0.45 = $1,937,778.
Answer (b). 3.
Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50.
Cost and Expenses include $1,112,500 variable and $1,112,500 fixed cost.
Contribution Margin = Sales - Variable = 2,400,000 - 1,112,500 = 1,287,500
Contribution Margin Ratio = Contribution Margin / Net Sales = 1,287,500/2,400,000 = 0.54
Breakeven Point in Dollars = Fixed Cost / Contribution Margin Ratio
= 1,112,500/0.54 = $2,060,185.
We will recommend to chose Altenative 1 whose has the lowest break-even point. It will be benefical to have no profit-loss situation as soon as possible.