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 75,400 units of product: Net sales $1,485,380; total costs and expenses $1,736,000; and net loss $250,620. Costs and expenses consisted of the following.

Total Variable Fixed
Cost of goods sold $1,201,500 $779,500 $422,000
Selling expenses 426,800 78,300 348,500
Administrative expenses 107,70046,500 61,200
$1,736,000 $904,300 $831,700

Management is considering the following independent alternatives for 2014.

1. Increase unit selling price 28% with no change in costs and expenses.

2. Change the compensation of salespersons from fixed annual salaries totaling $202,700 to total salaries of $42,700 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 2014.

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

Break-Even Point

The Break-even point is the level of sales that is equal to the total expenses. Items that affect the amount of the break-even point are the selling price, variable cost, and the fixed costs.

Answer and Explanation: 1

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Given:

  • Units Sold = 75,400 units
  • Unit selling price = $1,485,380 / 75,400 units = $19.70
  • Variable Cost = $904,300 / 75,400 units = $12
  • Fixed Cost =...

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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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