Question

Sheridan Corp.’s sales slumped badly in 2020. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 550,500 units of product: sales $2,752,500, total costs and expenses $2,855,400, and net loss $102,900. Costs and expenses consisted of the amounts shown below.
Total Variable Fixed
Cost of goods sold $2,140,000 $1,590,000 $550,000
Selling expenses 250,000 92,000 158,000
Administrative expenses 210,000 68,000 142,000
$2,600,000 $1,750,000 $850,000

Management is considering the following independent alternatives for 2018.

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 $150,000 to total salaries of $60,000 plus a 5% commission on sales.

Required:
a. Compute the break-even point in dollars for 2017. (Round final answer to 0 decimal places.)
b. Compute the contribution margin under each of the alternative courses of action. (Round final answer to 0 decimal places.)

Answer 1

Answer and Explanation:

a. Here we will follow some steps to reach break-even point in dollars for 2017 is shown below:-

Step 1

Selling price per unit = Sales ÷ Number of units

= $2,752,500 ÷ $550,500

= $5

Step 2

Variable cost per unit = Total of variable ÷ Number of units

= $1,750,000 ÷ $550,500

= $3

Step 3

Contribution margin ratio = (Selling price per unit - Variable cost per unit) ÷ Selling price per unit

= ($5 - 3) ÷ $5

= 0.4

and finally

Break even point in dollars = Fixed cost ÷ Contribution margin ratio

= $850,000 ÷ 0.4

= $2,125,000

b. As per the situation the solution of contribution margin under each of the alternative courses of action is below:-

According to the 1 alternative

Selling price per unit = $5 × 1.20

= $6

Contribution margin ratio = (Selling price per unit - Variable cost per unit) ÷ Selling price per unit

= ($6 - 3) ÷ $6

= 0.5

or

= 50%

According to the 2 alternative

Variable cost per unit = $3 + $5 × 5%

= $3.25

Contribution margin ratio = (Selling price per unit - Variable cost per unit) ÷ Selling price per unit

= ($5 - $3.25) ÷ $5

= 0.35

or

= 35%