Gorham Manufacturing\'s sales slumped badly in 2010. For the first time in its h
ID: 2443275 • Letter: G
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.
Increase unit selling price 20% with no change in costs, expenses, and sales volume.
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.
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 for 2010.
Compute the break-even point in dollars under each of the alternative courses of action. (Round ratios and final answers to 0 decimal places, e.g. 125.)
1.
2.
3. $
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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