Question

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 515,500 units of product: sales $2,577,500, total costs and expenses $2,680,600, and net loss $103,100. Costs and expenses consisted of the amounts shown below.

		Total		Variable		Fixed
Cost of goods sold		$2,206,340		$1,639,290		$567,050
Selling expenses		257,750		94,852		162,898
Administrative expenses		216,510		70,108		146,402
		$2,680,600		$1,804,250		$876,350

Management is considering the following independent alternatives for 2018.

1.		Increase unit selling price 23% with no change in costs, expenses, and sales volume.
2.		Change the compensation of salespersons from fixed annual salaries totaling $154,650 to total salaries of $61,860 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

$

(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, e.g. 1,225.)

Break-even point for alternative 1		$
Break-even point for alternative 2		$

Which course of action do you recommend?                                                           Alternative 1Alternative 2

Answer 1

Contribution Margin = Sales – Variable costs

Contribution Margin Ratio = Contribution Margin/Sales

= (2,577,500-1,804,250)/2,577,500

= 30%

Break even sales volume = Fixed costs/Contribution Margin Ratio

= 876,350/30%

= $2,921,166.67

Alternative 1:

Contribution Margin = 2,577,500*1.23- 1,804,250 = $1,366,075

Alternative 2: 2,577,500 – 1,804,250 – 2,577,500*5% = $644,375

CM Ratio

Alternative 1 = 43.09%

Alternative 2 = 644,375/2,577,500

= 25%

Break even point in Dollars

Alternative 1= 876,350/43.09% = $2,033,766.54

Alternative 2 = (876,350+61,860-154,650)/25% = $3,134,240

Alternative 1 is better since lower break even point