Problem - 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 75,000 units of product: net sales $1,500,000; total costs and expenses $1,900,000; and net loss $400,000. Costs and expenses consisted of the following.
|
Total
|
Variable
|
Fixed
|
|
Cost of goods sold
|
$1,245,000
|
$755,000
|
$490,000
|
|
Selling expenses
|
510,000
|
90,000
|
420,000
|
|
Administrative expenses
|
145,000
|
55,000
|
90,000
|
|
$1,900,000
|
$900,000
|
$1,000,000
|
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 $195,000 to total salaries of $35,000 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 2017.
(b) Compute the break-even point in dollars under each of the alternative courses of action.