Midlands Inc. had a bad year in 2016. For the first time in its history, it oper
ID: 2525069 • 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 75,000 units of product: net sales $1,875,000; total costs and expenses $1,780,000; and net loss $-95,000. 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 2017. (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. (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
Total
Variable
Fixed
Cost of goods sold $1,103,000 $598,000 $505,000 Selling expenses 525,000 95,000 430,000 Administrative expenses 152,000 57,000 95,000 $1,780,000 $750,000 $1,030,000Explanation / Answer
Contribution margin ratio = 1125000 / 1875000 = 0.6 (60%)
(a) Compute the break-even point in dollars
break-even point = Total fixed cost / contribution margin ratio
= 1030,000 / 0.6
= $1716,667
(b) Compute the break-even point in dollars under each of the alternative courses of action.
1. Selling price / Sold units
1875000/75000 = 25
Increase unit selling price 30% = 25*130% = 32.5
Sales 2437500 (32.5*75000)
Variable cost 750,000
Contribution 1687500
Contribution margin ratio = 1687500/ 2437500 = 0.69 (69%)
Break even point in dollar = 1,492,754 (1030,000/0.69)
2. Change compensation
Sales 1875000
Variable cost 750000
Contribution 1125000
Fixed cost(5% on sales) 93750 (1875000*5%)
1031250
1031250/1875000 = 0.55 Contribution margin
Break even point in dollar 1030000/0.55 = 1,872,727
$ Sales 1875,000 Less: Variable cost COGS - Variable 598,000 Selling price - variable 95,000 Administrative expenses-variable 57,000 750,000 Contribution 1,125,000 Less: Fixed Cost COGS -fixed 505,000 Selling price-fixed 430,000 Administrative expenses-fixed 95,000 1,030,000 Net income 95,000