Question

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 77,000 units of product: net sales $2,310,000; total costs and expenses $1,944,000; and net loss $366,000. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,275,000 $774,000 $501,000 Selling expenses 520,000 94,000 426,000 Administrative expenses 149,000 56,000 93,000 $1,944,000 $924,000 $1,020,000 Management is considering the following independent alternatives for 2017. 1. Increase unit selling price 25% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $197,000 to total salaries of $40,000 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. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

Answer 1

Answer:

BEP 2016: $ 1,700,000

BEP 2017:

under proposition a)

contribution margin:

(2,310,000 * 1.25 - 924,000) / 2,310,000 * 1.25 = 1,500,000

under porposition b)

fixed cost decrease by: 197,000 - 40,000 = 157,000

contribution margin decrease by 5% to 55%

(1,020,000 - 157,000) / (0.6 - 0.05) = 1,569,090.90

under proposition c)

We distrubute the same cost but now 50% is fixed and 50% variable:

1,944,000 x 50% = 927,000

contribution margin:

2,310,000 - 927,000 = 1,383,000

ratio: 1,383,000 / 2,310,000 = 0.5987

BEP

927,000 / 0.5987 = 1,548,354.77

Explanation:

Break even point formula:

$\frac{Fixed\:Cost}{Contribution \:Margin \:Ratio} = Break\: Even\: Point_{dollars}$

Where:

$\frac{Contribution \: Margin}{Sales \: Revenue} = Contribution \: Margin \: Ratio$

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

Sales: 2,310,000

Variable cost: 924,000

Contribution: 2,310,000 - 924,000 = 1,386,000

Contribution ratio: 1,386,000 / 2,310,000 = 0.6

Fixed cost: 1,020,000

BEP 2016

1,020,000 / 0.60 = 1,700,000