Case Analysis:
The condensed income statement of the Terri & Jerry Company for the year 2011 is as follows
TERRI & JERRY CO.
Income Status
For the year ended 12/31/2011
Sales (200,000 units) $ 1,200,000
Cost of merchandise sold 800,000
Gross Profit 400,000
Operational expenses:
Selling expenses $ 280,000
Administrative Expenses 160,000 440,000
Net loss = ($ 40,000)
An analysis of the behavior of the costs indicates that the following are variables: 75% of the cost of the merchandise sold, 50% of the selling expenses, and 25% of the administrative expenses.
Case instructions:
(Round off to the nearest unit, percentage, or dollar, or the percentage.) Present the income status in the CVG (CVP income statement) format with the earnings computation.)
A. Compute the breakeven point of sales in units and in dollars for the year described.
B. Terri has proposed a plan to take society out of the loss and improve its profitability. She believes that the quality of the product could be improved by paying $ 0.25 more for each unit of direct material. The sale price per unit could be increased only to $ 6.25 per unit, due to competition. Terri estimates that the volume of sales could increase 30%. What would be the effect of the changes planned by Terri on the dollar tie point and the profits of the company? (Round the percentage contribution marginal (contribution margin percentage) to two decimal places.)
C. Jerry's concentration in high school was marketing. He believes that the volume of sales can only be increased with an intensive advertising campaign, therefore, he proposed the following plan as an alternative to Terri's: (1) increase variable selling expenses to $ 0.79 per unit, (2) reduce the sale price per unit at $ 0.30, or (3) increase the fixed selling expenses by $ 35,000. Jerry cited an old marketing report that stated that sales would increase by 60% if these changes were made. What would be the effect of the proposed changes in Jerry's plan on the dollar tie point and society's earnings?
D. What plan should be accepted? Explain your answer