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

Question

Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company%u2019s income statement showed the following results from selling 75,100 units of product: Net sales $1,456,940; total costs and expenses $1,747,700; and net loss $290,760. Costs and expenses consisted of the following.

Total

Variable

Fixed

Cost of goods sold $1,201,400 $778,200 $423,200

Selling expenses 426,500 76,800 349,700

Administrative expenses 119,800 51,900 67,900

$1,747,700 $906,900 $840,800

Management is considering the following independent alternatives for 2014.

1. Increase unit selling price 29% with no change in costs and expenses.

2. Change the compensation of salespersons from fixed annual salaries totaling $203,200 to total salaries of $37,900 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. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

Break-even point

$

(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

Break-even point

1. Increase selling price

$

2. Change compensation

$

3. Purchase machinery

$

Which course of action do you recommend?

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Explanation / Answer

motivational leadership - concentrates on achieving sustained performance through personal growth, values-based leadership and planning that recognises human dynamics turning strategy into action - entails a phased approach, linking identified performance factors with strategic initiatives and projects designed to develop and optimise departmental and individual activities performance management - involving the construction of organizational processes and capabilities necessary to achieve performance through people delivering results

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