Question

Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 500,000 units of product: sales $2,500,000, total costs and expenses $2,600,000, and net loss $100,000. Costs and expenses consisted of the amounts shown below.
Cost of good sold $2,140,000 $1,590,0000 $550,000Selling expenses 250,000 92,000 158,000Administrative expenses 210,000 68,000 142,000Totals $2,600,000 $1,750,000 $850,000Management is considering the following independent alternatives for 2018.1) Increase unit selling price 20% with no change in cost, 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 salesa) compute the break-even point in dollars for 2017:Break-even point $ ?????????b) compute the contribution margin under each of the alternative courses of action:contribution margin for alternative 1 ?????? %contribution margin for alternative 2 ??????? %compute hte break-even point in dollars under each of the alternative courses of action:break-even point for alternative 1 $ ??????break-even point for alternative 2 $ ??????

Answer 1

Answer:

a) Break-even point in dollar for 2017

Contribution margin ratio = Contribution Margin/Sales

C.M Ratio = (Sales - Variable Cost)/Sales

C.M Ratio = $(2,500,000-1,750,000)/2,500,000

C.M Ratio = 0.30 or 30%

Break-even point in dollars = Fixed expense/C.M Ratio

B-E point ($) = $850,000/0.30

= $2,833,333.33

Alternative 1

Sales Price per unit after increasing 20%,

Sales Price = ($5*0.2) + $5 = $6

Total Sales ($) = (Sales Price x Sales Units)

Total Sales ($) = ($6*500,000) =$3,000,000

Contribution margin ratio = Contribution Margin/Sales

C.M Ratio = ($3,000,000- $1,750,000)/$3,000,000

C.M Ratio = 0.42 or 42%

Break-even point in dollars = Fixed expense/C.M Ratio

B-E point ($) = $850,000/0.42

= $2,023,809.52

Alternative 2

Commission = $2,500,000*5% = $125,000

Change in fixed annual salaries = $150,000-$60,000 = $90,000

Total fixed costs after deducting the changes in fixed salaries = $850,000-$90,000 = $760,000

Contribution margin ratio = Contribution Margin/Sales

C.M Ratio = (Sales - Variable Cost - Commission on sales)/Sales

C.M Ratio = ($2,500,000-$1,750,000-$125,000)/$2,500,000

C.M Ratio = 0.25 or 25%

Explanation:

Sales = $2,500,000

Sales Unit = $2,500,000/500,000 = $5

Variable Cost = 1,750,000

Fixed costs = $850,000