Midlands Inc. had a bad year in 2016. For the first time in its history, it oper
ID: 2559185 • 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 79,000 units of product: net sales $1,975,000; total costs and expenses $1,805,000; and net loss $170,000. Costs and expenses consisted of the following.
Total
Variable
Fixed
Total
Variable
Fixed
Cost of goods sold $1,148,000 $645,000 $503,000 Selling expenses 510,000 90,000 420,000 Administrative expenses 147,000 55,000 92,000 $1,805,000 $790,000 $1,015,000Explanation / Answer
Solution 1:
Current selling price = $1,975,000 / 79000 = $25 per unit
Current variable cost per unit = $790,000 / 79000 = $10 per unit
Existing contribution margin per unit = $25 - $10 = $15 per unit
Existing fixed cost = $1,015,000
If selling price will be increase by 30% then revised selling price = $25*130% = $32.50
Revised contribution per unit = $32.50 - $10 = $22.50
New contribution margin ratio = $22.50 / $32.50 = 69.23%
Breakeven point in dollar = $1,015,000 / 69.23% = $1,466,127
Solution 2:
Due to change in compensation of sales person from fixed annual salaries totalling $205,000 to total salaries of $36,000 plus a 5% commission on net sales, fixed cost will decrease by $169,000 ( $205,000 - $36,000) and variable cost will increase by $1.25 ($25*5%) per unit
New variable cost per unit = $10 + $1.25 = $11.25
New Fixed cost = $1,015,000 - $169,000 = $846,000
New Contribution margin per unit = $25 - $11.25 = $13.75
New contribution margin ratio = $13.75 / $25 = 55%
Breakeven point in sales dollar = $846,000 / 55% = $1,538,182
Solution 3:
New variable cost of good sold due to high tech machinery = $1,148,000*50% = $574,000
New fixed cost of goods sold = $1,148,000*50% = $574,000
New total variable cost = $574,000 + $90,000 + $55,000 = $719,000
New Total fixed cost = $574,000 + $420,000 + $92,000 = $1,086,000
New contribution = $1,975,000 - $719,000 = $1,256,000
New contribution margin ratio = $1,256,000 / $1,975,000 = 63.59493%
Breakeven sales in dollar = Fixed cost / contribution margin ratio = $1,086,000 / 63.59493% = $1,707,683