Gorham Manufacturing\'s sales slumped badly in 2010. For the first time in its h

Question

Gorham Manufacturing's sales slumped badly in 2010. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 600,000 units of product: Net sales $2,400,000; total costs and expenses $2,540,000; and net loss $140,000. Costs and expenses consisted of the amounts shown below.
Total Variable Fixed
Cost of goods sold $2,100,000 $1,440,000 $660,000
Selling expenses 240,000 72,000 168,000
Administrative expenses 200,000
48,000
152,000

$2,540,000
$1,560,000
$980,000



Management is considering the following independent alternatives for 2011.

1. Increase unit selling price 20% with no change in costs, expenses, and sales volume.

2. Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 3% commission on net sales.

3. Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 54% variable and 46% fixed.

Compute the break-even point in dollars under each of the alternative courses of action.Which course of action do you recommend?

Explanation / Answer

sales

2400 000

1,440,000

Goods sold

72,000

Selling expenses

48000

156000

contribution

840000

Profit volume ratio = 840000 /2400000 x100 =35%

Fixed cost--------660,000

Gold cost fixed---168,000

Expenses-----------152,000

Total------------------980,000

Break even point =980,000 x100 /35= 2,800,000

Break even point =980,000 x 45.83% = 2,138,337

Break even point =830,000 x x100 /30= 2,766,666

sales

2400 000

1,440,000

Goods sold

72,000

Selling expenses

48000

156000

contribution

840000

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