Problem - Gorham Manufacturing's sales slumped badly in 2008. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 600,000 units of product: Net sales $2,400,000; total costs and expenses $2,540,000; and net loss $140,000. Costs and expenses consisted of the amounts shown below.
Total Variable Fixed
Cost of goods sold $2,100,000 $1,440,000 $660,000
Selling expenses 240,000 72,000 168,000
Administrative expenses 200,000 48,000 152,000
$2,540,000 $1,560,000 $980,000
Management is considering the following independent alternatives for 2009.
1. Increase unit selling price 20% with no change in costs, expenses, and sales volume.
2. Change the compensation of salespersons from fixed annual salaries totaling $210,000 to total salaries of $60,000 plus a 5% commission on net sales.
Hint: Compute break-even point under alternative courses of action.
Instructions -
(a) Compute the break-even point in dollars for 2008.
(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round all ratios to nearest full percent.) Which course of action do you recommend?