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 $210,000 to total salaries of $60,000 plus a 5% commission on net sales.
-What is the break even poiont?
-Compute the break-even point in dollars under each of the alternative courses(1&2) of action. (Round unit price and ratios to 3 decimal places, e.g. 3.510, and final answers to 0 decimal places, e.g. 2,250,100.)

Explanation / Answer

Sales 2,400,000.00 Less: variable cost Cost of goods sold 1,440,000.00 Selling expenses 72,000.00 Administrative expenses 48,000.00 1,560,000.00 Contribution 840,000.00 Profit volume ratio= contribution/sales×100 840000/2400000×100=35% Break-even point= Fixed cost/pvratio Fixed cost cost of goods sold-fixed 660,000.00 Selling expenses 168,000.00 Administrative expenses 152,000.00 980,000.00 Break-evenpoint= 980000×100/35 2,800,000.00 Increasing unit selling by20% with no change in cost and quantity Actual sales 2,400,000.00 20% increase=2400000×120/100 2,880,000.00 Sales 2,880,000.00 Less: variable cost 1,560,000.00 contribution 1,320,000.00 Profit volume ratia=contribution/sales×100 1320000/2800000×100=45.83% Break even point= Fixed cost/pvratio 980000/45.83% 2,138,337.00 Fixed cost 980,000.00 Less: salespersons salaries 210,000.00 770,000.00 Add: revised pay 60,000.00 Fixed cost 830,000.00 Variable cost 1,560,000.00 Add: sales persons commission 5% on net sales 120,000.00 Variable cost 1,680,000.00 Sales 2,400,000.00 Less: variable cost 1,680,000.00 contribution 720,000.00 profit volume ratio= contribution/sales×100 720000/2400000×100=30% break even point=Fixed cost/PV ratio 830000×100/30= 2,766,666.67

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