Problem
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 77,000 units of product: net sales $1,540,000; total costs and expenses $1,656,000; and net loss $116,000. Costs and expenses consisted of the following.
|
Total
|
Variable
|
Fixed
|
|
Cost of goods sold
|
$984,000
|
$465,000
|
$519,000
|
|
Selling expenses
|
521,000
|
93,000
|
428,000
|
|
Administrative expenses
|
151,000
|
58,000
|
93,000
|
|
$1,656,000
|
$616,000
|
$1,040,000
|
Management is considering the following independent alternatives for 2017.
1. Increase unit selling price 25% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $198,000 to total salaries of $38,000 plus a 5% commission on net sales.
3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50.
(a) Compute the break-even point in dollars for 2017.
(b) Compute the break-even point in dollars under each of the alternative courses of action.