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’s income statement showed the following results from selling 77,900 units of product: Net sales $1,534,630; total costs and expenses $1,740,100; and net loss $205,470. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,201,000 $779,000 $422,000 Selling expenses 422,100 74,300 347,800 Administrative expenses 117,000 45,600 71,400 $1,740,100 $898,900 $841,200 Management is considering the following independent alternatives for 2014. 1. Increase unit selling price 24% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $201,900 to total salaries of $44,000 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. 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 $ 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?

Explanation / Answer

Amount Per unit Net sales 1534630 19.7 Less Variable cost 898900 Contribution margin 635730 Less Fixed cost 841200 Net income -205470 Situation 1 Situation 2 Situation 3 Net sales 1902941 1534630 1534630 Less Variable cost 898900 975632 720400 Contribution margin 1004041 558999 814230 Less Fixed cost 841200 683300 1019700 Net income 162841 -124302 -205470 Contribution margin ratio = contribution margin / sales 0.5276 0.3643 0.5306 Breakeven in dollars =Fixed cost/ contribution margin ratio 1594311 1875877 1921892 I would recommed situation 1 as it has least breakeven in dollars

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