Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it

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 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 79,628 166,282 $3,044,600 $2,049,250 $995,350 292,750 245,910

Explanation / Answer

Solution a:

Contribution margin for 2017 = Sales - Variable expenses = $2,927,500 - $2,049,250 = $878,250

Contribution margin ratio = $878,250 / $2,927,500 = 30%

Fixed expenses for 2017 = $995,350

Breakeven point in dollar for 2017 = Fixed cost / contribution margin ratio = $995,350 / 30% = $3,317,833

Solution b:

New sales in 2018 after considering 24% increase in selling price = $2,927,500 * 124% = $3,630,100

Contribution margin for alternative 1 in 2018 = $3,630,100 - $2,049,250 = $1,580,850

Alternative 2:

New variable cost for 2018 considering sales commissions = $2,049,250 + ($2,927,500*6%) = $2,224,900

Contribution margin for alternative 2 = $2,927,500 - $2,224,900 = $702,600

New contribution margin ratio for alternatvie 1 = $1,580,850 / $3,630,100 = 43.54838%

Breakeven point for alternative 1 = $995,350 / 43.54838% = $2,285,619

Contribution margin ratio for alternative 2 = $702,600 / $2,927,500 = 24%

New fixed costs for alternative 2 = $995,350 - $175,650 + $70,260 = $889,960

Breakeven point for altrenative 2 = $889,960 / 24% = $3,708,167

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