Question - A Dousmann Corp.'s sales slumped badly in 2014. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 500,000 units of product: sales $2,500,000; total costs and expenses $2,600,000; and net loss $100,000. Costs and expenses consisted of the amounts shown below.
|
Total
|
Variable
|
Fixed
|
|
Cost of Goods Sold
|
$2,140,000
|
$1,540,000
|
$600,000
|
|
Selling Expenses
|
250,000
|
92,000
|
158,000
|
|
Administrative Expenses
|
210,000
|
68,000
|
142,000
|
|
$2,600,000
|
$1,700,000
|
$900,000
|
Management is considering two independent alternatives for the 2015.
A. Increase unit selling price 20% with no change in costs, expenses, or sales volume.
B. Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 5% commission on sale
1. Compute break-even point in dollars for 2014.
2. Compute the breakeven point for each alternative course of action.
3. What course of action do you recommend and why?