Midlands Inc, had a bad year in 2016, For the first time in its history, it oper
ID: 2509493 • 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 $2,175,000; and net loss s-165,000. Costs and expenses consisted of the fallowing. Total Variable Fixed $483,000 427,000 95,000 $1,005,000 Cost of goods sold Selling expenses $1,504,000 S19,000 152,000 $2,175,000 $1,021,000 92,000 57,000 $1,170,000 Management is considering the following independent alternatives for 2017 1. Increase unit selling price 25% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling 201,000 to total salaries of $35,000 plus a 5% commission on net sales 3. Purchase new high-tech factory machinery that will change the proportion between variable and fxed 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 decimai places, e.g. 2,510.) Break-even point 1. Increase selling price 2. Change compensation 3. Purchase machineryExplanation / Answer
Solution:(a): Calculation of break-even point:
Contribution margin = Net sales - Variable costs
= 2,340,000 - 1,170,000 = $1,170,000
CM % = 1170000/2340000 = 0.5 or 50%
Break-even point in dollars = fixed costs/CM%
= 1005000/0.5 = $2,010,000
Solution:(b): Calculation of break-even point in dollars under different alternatives:
(1) Increase selling price:
New selling price per unit = (2340000/78000)*125%
= $37.5
Total sales = 37.5*78000 = $2,925,000
Contribution margin % = (2925000-1170000)/2925000
= 0.6 or 60%
Break-even point in dollars = 1005000/0.6
= $1,675,000
(2) Change Compensation:
New fixed cost = 1005000-201000+35000 = $839,000
New variable cost = 1170000+ (2340000*5%)
= $1,287,000
CM% = (2340000-1287000)/2340000 = 0.45 or 45%
Break-even point in dollars= 839000/0.45= $1,864,444
(3) Purchase Machinery:
New variable cost = (1504000*50%)+92000+57000
= $901,000
New fixed cost = (1504000*50%)+427000+95000
= $1,274,000
CM% = (2340000-901000)/2340000 = 61.5%
Break-even point in dollars = 1274000/61.5%
= $2,071,545