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
<u>Alternative 1</u>
<em>Sales Price per unit after increasing 20%,</em>
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
<u>Alternative 2</u>
<em>Commission</em> = $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
