Question

Midlands Inc. had a bad year in 2016. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 79,000 units of product: net sales $1,580,000; total costs and expenses $1,968,000; and net loss $388,000. Costs and expenses consisted of the following.

		Total		Variable		Fixed
Cost of goods sold		$1,300,000		$796,000		$504,000
Selling expenses		520,000		94,000		426,000
Administrative expenses		148,000		58,000		90,000
		$1,968,000		$948,000		$1,020,000

Management is considering the following independent alternatives for 2017.

1.		Increase unit selling price 25% with no change in costs and expenses.
2.		Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $43,000 plus a 5% 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.

(a) Compute the break-even point in dollars for 2017. (Round contribution margin ratio to 2 decimal places e.g. 0.25 and final answer to 0 decimal places, e.g. 2,510.)

Break-even point

$enter the break-even point in dollars rounded to 0 decimal places

(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

				Break-even point
1.		Increase selling price		$enter a dollar amount rounded to 0 decimal places
2.		Change compensation		$enter a dollar amount rounded to 0 decimal places
3.		Purchase machinery		$enter a dollar amount rounded to 0 decimal places

Which course of action do you recommend? select a course of action using the break-even analysis                                                           Alternative 1Alternative 2Alternative 3

Please be clear on your answers and if you can, circle it.

Answer 1