Question - MANAGERIAL ANALYSIS - The condensed income statement for the Peri and Paul partnership for 2017 is as follows.
|
PERI AND PAUL COMPANY Income Statement For the Year Ended December 31, 2017
|
|
Sales (240,000 units)
|
|
$1,200,000
|
|
Cost of goods sold
|
|
800,000
|
|
Gross profit
|
|
400,000
|
|
Operating expenses
|
|
|
|
Selling
|
$280,000
|
|
|
Administrative
|
150,000
|
430,000
|
|
Net loss
|
|
$ (30,000)
|
A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.
Instructions - (Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.)
(a) Compute the break-even point in total sales dollars and in units for 2017.
(b) Peri has proposed a plan to get the partnership "out of the red" and improve its profitability. She feels that the quality of the product could be substantially improved by spending $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $5.25 because of competitive pressures. Peri estimates that sales volume will increase by 25%. What effect would Peri's plan have on the profits and the break-even point in dollars of the partnership? (Round the contribution margin ratio to two decimal places.)
(c) Paul was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Peri's: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling expenses by $40,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. What effect would Paul's plan have on the profits and the break-even point in dollars of the partnership?
(d) Which plan should be accepted? Explain your answer.
Attachment:- PROJECT TEMPLATE.rar