Problem 18-3A Tanek Corp.\'s sales slumped badly in 2017. For the first time in
ID: 2550085 • 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 515,500 units of product: sales $2,577,500, total costs and expenses $2,680.600, and net loss $103,100. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold Selling expenses Administrative expenses $2,206.340 $1,639,290 S567 050 257,750 94.852 162,898 70,108 146,402 $2,680,600 $1,804,250 S876350 216 510 the following independent altem 1 , Increase unit selling price 23% with no change in costs, expenses, and sales volume. 2 Change the compensation of salespersons from fixed annual salanes totaling $154,650 to total salanes of S61 ,860 plus a 5% commission on sales. (a) Compute the break-even point in dollars for 2017. ( Round final answer to 0 decimal places, e·g·1,225.) Break even point (b) Compute the contribution margin under each of the alternative courses of action. (Round final answer to 0 decimal places, e.g. 1,225.) Contribution margin for alternative 1 Contribution margin for alternative 2 Compute the break even pont in dollars under each ofthe alternative course of action. Round selling price per inil to 2 decimal places eg. 5.25 and other calculations to 0 decimal places, eg. 20% and also nal answer to 0 decimal places, e.g. 1,225.) Break-even point for alternative 1 Break even point for altemative 2 Which course of action do you recommend?Explanation / Answer
(a)
Contribution margin = Sales revenue - Variable expenses
= 2,577,500 - 1,804,250
= 773,250
Contribution margin percentage = Contribution margin / sales revenues
= 773,250 / 2,577,500
= 30%
Breakeven point = Fixed costs / Contribution margin percentage
= 876,350 / 30%
= 2,921,167
(b)
Alternative 1
Sales = 2,577,500 + (2,577,500*23%)
= 3,170,325
Variable costs = 1,804,250
Contribution margin = Sales - Variable costs
= 3,170,325 - 1,804,250
= 1,366,075
Contribution margin percentage = contribution margin / sales
= 1,366,075 / 3,170,325
= 43.09%
Alternative 2
Variable costs = 1,804,250 + (2,577,500*5%)
= 1,933,125
Fixed costs = 876,350 - 154,650 + 61,860
= 783,560
Contribution margin = Sales - Variable costs
= 2,577,500 - 1,933,125
= 644,375
Contribution margin percentage = contribution margin / sales
= 644,375 / 2,577,500
= 25%
Breakeven point for alternative 1 = Fixed costs / contribution margin percentage = 876,350 / 43.09% = 2,033,767
Breakeven point for alternative 2 = Fixed costs / contribution margin percentage = 783,560 / 25% = 3,134,240
Alternative 1 is recommended as Alternative 2 results in losses.