Midlands Inc. had a bad year in 2016. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 80,000 units of product: net sales $2,000,000; total costs and expenses $2,210,000; and net loss $210,000. Costs and expenses consisted of the following.
Total
Variable
Fixed
Cost of goods sold $1,546,000 $1,051,000 $495,000
Selling expenses 518,000 93,000 425,000
Administrative expenses 146,000 56,000 90,000
$2,210,000 $1,200,000 $1,010,000
Management is considering the following independent alternatives for 2017.
1. Increase unit selling price 20% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $205,000 to total salaries of $42,000 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 2016. (Round contribution margin ratio to 2 decimal places e.g. 0.25 and final answer 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 for 2017. (Round contribution margin ratio to 4 decimal places e.g. 0.2510 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?
Alternative 1
Alternative 2
Alternative 3