Question

Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 77,900 units of product: Net sales $1,534,630; total costs and expenses $1,740,100; and net loss $205,470. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,201,000 $779,000 $422,000 Selling expenses 422,100 74,300 347,800 Administrative expenses 117,000 45,600 71,400 $1,740,100 $898,900 $841,200 Management is considering the following independent alternatives for 2014. 1. Increase unit selling price 24% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $201,900 to total salaries of $44,000 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. Compute the break-even point in dollars for 2014. (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 $ 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 $ 2. Change compensation $ 3. Purchase machinery $ Which course of action do you recommend?

Answer 1

		Amount	Per unit
	Net sales	1534630	19.7
Less	Variable cost	898900
	Contribution margin	635730
Less	Fixed cost	841200
	Net income	-205470
		Situation 1	Situation 2	Situation 3
	Net sales	1902941	1534630	1534630
Less	Variable cost	898900	975632	720400
	Contribution margin	1004041	558999	814230
Less	Fixed cost	841200	683300	1019700
	Net income	162841	-124302	-205470
	Contribution margin ratio = contribution margin / sales	0.5276	0.3643	0.5306
	Breakeven in dollars =Fixed cost/ contribution margin ratio	1594311	1875877	1921892
	I would recommed situation 1 as it has least breakeven in dollars