Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 76,900 units of product: Net sales $1,499,550; total costs and expenses $1,729,700; and net loss $230,150. Costs and expenses consisted of the following.
Total
Variable
Fixed
Cost of goods sold $1,203,300 $781,800 $421,500
Selling expenses 416,400 75,000 341,400
Administrative expenses 110,000 40,900 69,100
$1,729,700 $897,700 $832,000
Management is considering the following independent alternatives for 2014.
1. Increase unit selling price 29% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $204,000 to total salaries of $43,500 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 2014. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)
Break-even point
$
(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)
Break-even point
1. Increase selling price
$
2. Change compensation
$
3. Purchase machinery
$
Which course of action do you recommend?