Question

The condensed income statement for the Oriole and Paul partnership for 2020 is as follows.

Oriole and Paul Company Income Statement For the Year Ended December 31, 2020
Sales (300,000 units)				$1,500,000
Cost of goods sold				960,000
Gross profit				540,000
Operating expenses
Selling		$350,000
Administrative		232,500
				582,500
Net loss				$(42,500	)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.

Paul was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Oriole’s: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling expenses by $49,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. What effect would Paul’s plan have on the profits and the break-even point in dollars of the partnership? (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.) Amount Effect Profit $ Break-even point $

Answer 1