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 79,000 units of product: net sales $1,975,000; total costs and expenses $1,997,500; and net loss $22,500.
Costs and expenses consisted of the following:
|Cost of goods sold||$1,337,500||$840,500||$497,000|
Management is considering the following independent alternatives for 2017
1) Increase unit selling price 20% with no change in costs and expenses.
2) Change the compensation of salespersons from fixed annual salaries totaling $199,000 to total salaries of $43,000 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 2017.
b) Compute the break-even point in dollars under each of the alternative courses of action.
|1. Increase selling price|
|2. Change compensation|
|3. Purchase machinery|
Which course of action do you recommend?
Calculate the Break-Even Point:
The break-even point is defined as the point where sales revenue is equal to total costs and expenses. To calculate the break-even point, the contribution margin and the total fixed costs should be known.
Answer and Explanation: 1
|2017||2018 Alternative 1||2018 Alternative 2||2018 Alternative 3|
|Net sales||$1,975,000||$2,370,000 |
$1,975,000 x 1.2
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fromChapter 5 / Lesson 28
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.