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Midlands Inc. had a bad year in 2016. For the first time in its history, it operated at a loss. ...

Question:

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:

Total Variable Fixed
Cost of goods sold $1,337,500 $840,500 $497,000
Selling expenses $14,000 91,000 423,000
Administrative expenses 146,000 56,000 90,000
$1,997,500 $987,500 $1,010,000

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.

Break-even point
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

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2017 2018 Alternative 1 2018 Alternative 2 2018 Alternative 3
Net sales $1,975,000 $2,370,000
$1,975,000 x 1.2
$1,975,000 $1,875,000
Total...

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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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