Problem 22-3A Tanek Corp.\'s sales slumped badly in 2017. For the first time in
ID: 2605280 • Letter: P
Question
Problem 22-3A Tanek Corp.'s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 585,500 units of product: sales $2,927,500, total costs and expenses $3,044,600, and net loss $117,100. Costs and expenses consisted of the amounts shown below Total Variable Fixed Cost of goods sold Selling expenses Administrative expenses $2,505,940 $1,861,890 $644,050 107,732185,018 166,282 $3,044,600 $2,049,250 $995,350 292,750 245,910 79,628 Management is considering the following independent alternatives for 2018 I. Increase unit selling price 21% with no change in costs, expenses, and sales volume 2. Change the compensation of salespersons from fixed annual salaries totaling $175,650 to total salaries of $70,260 plus a 5% commission on sales. (a) Compute the break-even point in dollars for 2017. (Round final answer to 0 decimal places, e.g. 1,225.) Break-even point s (b) Compute the contribution margin under each of the alternative courses of action. (Round final answer to 0 decimal places, e.g. 1,225.) Contribution margin for alternative 1 Contribution margin for alternative 2 Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, eg. 1,225.) Break-even point for alternative 1 s Break-even point for alternative 2 Which course of action do you recommend?Explanation / Answer
Answer
Working
Units
Amount
Per unit
A
Sales
585500
2927500
5
(less) Variable Costs
B
Cost of Goods Sold
585500
1861890
3.18
C
Selling Expenses
585500
107732
0.184
D
Administrative expenses
585500
79628
0.136
E=B+C+D
Total Var Cost
585500
2049250
3.5
F=A-E
Contribution Margin
585500
878250
1.5
(less) Fixed expenses
G
Cost of Goods Sold
644050
H
Selling Expenses
185018
I
Administrative expenses
166282
J=G+H+I
Total Fixed expenses
995350
K=F-J
Net Income(Loss)
(117100)
A
Total Fixed expenses (from above)
995350.00
B
Contribution Margin per unit (from above)
1.50
C=A/B
Break Even point in units
663566.67
D
Sale Price per unit (from above)
5.00
E=C x D
Break Even point in dollars
$ 3317833
Working
Units (A)
Amount (A x B)
Per unit (B)
A
Sales at new Sales price
585500
3542275
6.05 [5 + (5 x 21%)]
(less) Variable Costs
B
Cost of Goods Sold
585500
1861890
3.18
C
Selling Expenses
585500
107732
0.184
D
Administrative expenses
585500
79628
0.136
E=B+C+D
Total Var Cost
585500
2049250
3.5
F=A-E
Contribution Margin
585500
1493025
2.55
(less) Fixed expenses
G
Cost of Goods Sold
644050
H
Selling Expenses
185018
I
Administrative expenses
166282
J=G+H+I
Total Fixed expenses
995350
K=F-J
Net Income(Loss)
497675
Contribution margin for alternative 1
Contribution per unit
2.55
Sale Price
6.05
Contribution margin for Alt 1 [2.55/6.05]
42%
Break Even point in dollars
Total fixed expenses
995350
Contribution margin for Alt 1
42%
Break Even point in dollar [995350/42%]
2369880.95
Working
Units
Amount
Per unit
A
Sales
585500
2927500
5
(less) Variable Costs
B
Cost of Goods Sold
585500
1861890
3.18
C
Selling Expenses
585500
107732
0.184
D=A x 5%
Commission on sales
585500
146375
0.25
E
Administrative expenses
585500
79628
0.136
F=B+C+D+E
Total Var Cost
585500
2195625
3.75
G=A-F
Contribution Margin
585500
731875
1.25
(less) Fixed expenses
H
Cost of Goods Sold
644050
I
Selling Expenses
[185018-175650+70260]
79628
J
Administrative expenses
166282
K=H+I+J
Total Fixed expenses
889960
L=G-K
Net Income(Loss)
(158085)
Contribution margin for alternative 2
Contribution per unit
1.25
Sale Price
5
Contribution margin for Alt 2 [1.25/5]
25%
Break Even point in dollars
Total fixed expenses
889960
Contribution margin for Alt 1
25%
Break Even point in dollar [889960/25%]
3559840.00
Answer: Alternative 1, as increasing sales price without incurring any extra cost is a good strategy. Provided that increased sales price don’t result in fall in demand for the product concerned.
Working
Units
Amount
Per unit
A
Sales
585500
2927500
5
(less) Variable Costs
B
Cost of Goods Sold
585500
1861890
3.18
C
Selling Expenses
585500
107732
0.184
D
Administrative expenses
585500
79628
0.136
E=B+C+D
Total Var Cost
585500
2049250
3.5
F=A-E
Contribution Margin
585500
878250
1.5
(less) Fixed expenses
G
Cost of Goods Sold
644050
H
Selling Expenses
185018
I
Administrative expenses
166282
J=G+H+I
Total Fixed expenses
995350
K=F-J
Net Income(Loss)
(117100)
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