galali Manufacturing had a bad year in 2005. For the first time in its history i
ID: 2423659 • Letter: G
Question
galali Manufacturing had a bad year in 2005. For the first time in its history it operated at a loss. The company's income statement showed the following results from selling 60,000 units of product: Net sales $1,500,000; total costs and expenses $1,740,000; and net loss $240,000. Costs and expenses consisted of the following: 1st number : Total, 2nd number : Variable 3rd: Fixed Cost of goods sold $1,200,000 $780,000 $420,000 Selling expenses 420,000 65,000 355,000 Administrative expenses 120,000 55,000 65,000 TOTAL $1,740,000 $900,000 $840,000 Management is considering the following independent alternatives for 2006. 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 $200,000 to total salaries of $30,000 plus a 6% commission on net sales. 3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50. instructions: (a)Compute the break-even point in dollars dollars for 2005 (b) compute the breakeven point in dollars under each of the alternative courses of action which course of action do you recommend?
Explanation / Answer
Answer:(a) BEP ($) For 2005=Fixed cost/Contribution margin ratio
=840000/0.40
=$2100000
Contribution margin ratio=(Contribution margin/Sales)*100
=((1500000-900000)/1500000)*100
=40%
Answer:(b) Alternative 1:
New Selling price=(1500000/60000)*1.20
=30
Variable cost per unit=900000/60000=15
Contribution per unit=30-15=15
Contribution margin ratio=(15/30)*100=50%
BEP ($)=840000/0.50=$1680000
Alternative 2:
FC=840000-200000 (decrease by 200000)+30000 (increase instead by 40000)=670000
VC (unit)=15 (from 1st case) + 6%*25 (SellingP) (it is 6% commissions per unit on net sales)=16.5
BEP (Units)=670000/(25-16.5)
=78823.53 units
BEP ($)=78823.53*$25=1970588.24
Alternative 3:
.FC=VC=1740000/2=870000
VC (unit)=870000/60000=14.5
BE Q=870000/(25 (original sales P)-14.5)=82857.14
BE In $=82857.14*25=2071428.5
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