Problem 18-3A Tanek Corp.’s sales slumped badly in 2017. For the first time in i
ID: 2549274 • Letter: P
Question
Problem 18-3A
Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 585,500 units of product: sales $2,927,500, total costs and expenses $3,044,600, and net loss $117,100. Costs and expenses consisted of the amounts shown below.
Total
Variable
Fixed
Management is considering the following independent alternatives for 2018.
(a) Compute the break-even point in dollars for 2017. (Round final answer to 0 decimal places, e.g. 1,225.)
(b) Compute the contribution margin under each of the alternative courses of action. (Round final answer to 0 decimal places, e.g. 1,225.)
Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, e.g. 1,225.)
Which course of action do you recommend?
Total
Variable
Fixed
Cost of goods sold $2,505,940 $1,861,890 $644,050 Selling expenses 292,750 107,732 185,018 Administrative expenses 245,910 79,628 166,282 $3,044,600 $2,049,250 $995,350Explanation / Answer
a) Break Even Point in Dollars for 2017. Break Even Point in Dollars (Fixed Cost / Contribution margin per unit ) * Sales price per unit Contribution Margin Sales - Variable Cost Number of Units 585,500 Fixed Cost 995,350 Sales price per unit 5 Sales 2,927,500 Variable Cost 2,049,250 Contribution Margin 878,250 Contribution Margin per Unit 1.50 Break Even Point in Dollars (995,350/1.50)*5 = 3,317,833 b) Contribution Margin : Alternative 1 : Increase the unit Selling price 23% with no change in cost, expenses and Sales Volume Number of Units 585,500 Fixed Cost 995,350 Sales price per unit 6.15 Sales 3,600,825 Variable Cost 2,049,250 Contribution Margin 1,551,575 Contribution Margin per Unit 2.65 Alternative 2 : Change the Compensation of Sales person from Fixed Annual Salaries totalling $175,650 to total Salaries of $70,260 +5% Commission on Sales. Calculation of New Fixed Selling Expenses: Old Fixed Selling Expenses 185,018 (-) Annual Fixed Salaries 175,650 Net Selling Expenses 9,368 (+) New Fixed Salaries 70,260 New Fixed Selling Expenses 79,628 Calculation of New Variable Selling Expenses: Old Variable Selling Expense 107,732 (+) 5% commission on Sales 146,375 New Variable Selling Expense 254,107 Number of Units 585,500 Fixed Cost 889,960 Sales price per unit 5.00 Sales 2,927,500 Variable Cost 2,195,625 Contribution Margin 731,875 Contribution Margin per Unit 1.25 c) Break Even Point in Dollars for each Alternatives: Alternative 1 : Increase the unit Selling price 23% with no change in cost, expenses and Sales Volume Break Even Point in Dollars (Fixed Cost / Contribution margin per unit ) * Sales price per unit Contribution Margin Sales - Variable Cost Number of Units 585,500 Fixed Cost 995,350 Sales price per unit 6.15 Sales 3,600,825 Variable Cost 2,049,250 Contribution Margin 1,551,575 Contribution Margin per Unit 2.65 Break Even Point in Dollars (995,350/2.65)*6.15 = 2,309,963 Alternative 2 : Change the Compensation of Sales person from Fixed Annual Salaries totalling $175,650 to total Salaries of $70,260 +5% Commission on Sales. Break Even Point in Dollars (Fixed Cost / Contribution margin per unit ) * Sales price per unit Contribution Margin Sales - Variable Cost Number of Units 585,500 Fixed Cost 810,332 Sales price per unit 5.00 Sales 2,927,500 Variable Cost 2,049,250 Contribution Margin 878,250 Contribution Margin per Unit 1.50 Break Even Point in Dollars (810,332/1.50)*5 = 2,701,107 Based on the calculations Alternative 1 is recommended as the Break Even Sales is less compared to Alternative 2 as well the contibution per unit is also higher leading to higher profits provided they are able to Sell same volume with the increase in Selling price per unit.