Problem 6-1A Midlands Inc. had a bad year in 2016. For the first time in its his
ID: 2550484 • Letter: P
Question
Problem 6-1A 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 Cost of goods sold Selling expenses Administrative expenses $1,103,000 $598,000 95,000 57,000 $1,780,000 750,000 $505,000 430,000 95,000 $1,030,000 525,000 152,000 Management is considering the following independent alternatives for 2017. I. Increase unit selling price 30% with no change in costs and expenses. 2. Ch ange the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $40,000 plus a 5% commission on net sales. 3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed (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 O decimal places, e.g. 2,510 Break-even points (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 O decimal places, e.g. 2,51o.)Explanation / Answer
Break even Point in dollars = Fixed costs/Contribution Margin Ratio Requirement a Break even Point in dollars for 2016 Sales 18,75,000 Less: Variable costs 7,50,000 Contribution Margin 11,25,000 CM Ratio 0.60 CM Ratio = Contribution margin / Sales Break even Point in dollars = 1,030,000/0.60 = $ 1,716,667 Requirement a Break even Point in dollars for 2017 1. Increase Selling price Sales 24,37,500 (1,875,000 X130%) Less: Variable costs 7,50,000 Contribution Margin 16,87,500 CM Ratio 0.6923 Break even Point in dollars = 1,030,000/0.6923 = $ 1,487,794 2. Change Compensation Sales 18,75,000 Less: Variable costs 8,43,750 750,000+(1,875,000 X5%) Contribution Margin 10,31,250 CM Ratio 0.5500 Break even Point in dollars = (1,030,000-160,000)/0.55 = $ 1,581,818 2. Purchase Machinery Sales 18,75,000 Less: Variable costs 8,90,000 (1,780,000 X50%) Contribution Margin 9,85,000 CM Ratio 0.5253 Break even Point in dollars = 890,000/0.5253 = $ 1,694,270 Alternative 1 - Increase in Selling price can be recommended Reason: it has less break even point in dollars