Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss....

Question:

Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 75,200 units of product: Net sales $1,466,400; total costs and expenses $1,742,800; and net loss $276,400. Costs and expenses consisted of the following.

Total Variable Fixed
Cost of goods sold$1,198,000$776,200$421,800
Selling expenses417,10074,000343,100
Administrative expenses127,70049,80077,900
$1,742,800$900,000$842,800

Management is considering the following independent alternatives for 2014.

1. Increase unit selling price 21% with no change in costs and expenses.

2. Change the compensation of salespersons from fixed annual salaries totaling $199,100 to total salaries of $40,200 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.

Compute the break-even point in dollars for 2014.

Compute the break-even point in dollars under each of the alternative courses of action.

Which course of action do you recommend?

Calculate Break-Even Point in Dollars

An important internal analysis is for every type of business or firm to calculate the amount of sales or revenues it requires to break-even. To prepare this analysis, a firm must analyze all of it's expenses and classify it's expenses into variable and fixed costs. Once this classification is completed, the contribution margin (sales - variable costs) must be determined. From here, using fixed costs, it can be calculated how much sales or revenues need to be in order for the business to break-even.

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Compute the break-even point in dollars for 2014.

We are given that total fixed costs are $842,800; this means that Sales - Variable Costs must =...

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How to Calculate the Break-Even Point - Definition & Formula

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Chapter 5 / Lesson 28
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See how to calculate break-even point (in units and dollars). See the variables of the break-even point formula and examples. Understand the purpose of break-even analysis.


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