Gorham Manufacturing\'s sales slumped badly in 2012. For the first time in its h

Question

Gorham Manufacturing's sales slumped badly in 2012. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 600,000 units of product: Net sales $2,400,000; total costs and expenses $2,540,000; and net loss $140,000. Costs and expenses consisted of the amounts shown below.
Total Variable Fixed
Cost of goods sold $2,100,000 $1,440,000 $660,000
Selling expenses 240,000 72,000 168,000
Administrative expenses 200,000 48,000 152,000
$2,540,000 $1,560,000 $980,000



Management is considering the following independent alternatives for 2013.

1. Increase unit selling price 20% with no change in costs, expenses, and sales volume.
2. Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 3% commission on net sales.
3. Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 54% variable and 46% fixed.

Explanation / Answer

We have No of Units Sold = 600,000 Total Var cost = $1,560,000 SO Var cost pu = Total Var cost/No of unts = $1560,000/600,000 = $2.60 Total Sales Rev = $2,400,000 So Sale price pu = Total Sales/No of Units = $2,400,000/600,000 = $4.00 SO COnt pu = Sae price pu - Var cost pu = $4.00-$2.60 = $1.40 So Total Cont = No of units * COnt pu = 600,000*$1.40 = $840,000 SO Income Stateet will look as below :- Sales $2,400,000 Less Var cost $1560,000 =------------------------- Total COnt $840,000 Less Fixed cost $980,000 ------------------------------- Net Loss $140,000 ------------------------ Now to attack the options:- 1. Increase unit selling price 20% with no change in costs, expenses, and sales volume. So New Unit price = 1.20*$4.00 = $4.80 As theer is no other change, Cont PU = Sale prce pu - Var cost pu = $4.80-$2.60 = $2.20 So Total COnt = No of units * COnt pu = 600,000*$2.20 = $1,320,000 Less Fixed cost $980,000 So Tota Profit = $340,000 .....................Ans (1) 2. Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 3% commission on net sales. Earlier Fixed Sales cost = $168,000 = $150,000 Salary + $18,000 other Exp So Revised Fixed sales cost = $60,000 + $18000 = $78,000 ...(a) Earlier Var sales cost = $72,000 New Var Sales cost = $72000+3%*Sales Rev = $72000+3%*2400,000 = $144,000 ..(b) SO Income Stateet will look as below :- Sales $2,400,000 Less Var cost : COGS $1440,000 Selling exp $144,000 Admin Exp $48,000 ------------------------- Total COnt $768,000 Less Fixed cost COGS $660,000 Selling exp $78,000 Admin exp $152,000 ------------------------------- Net Loss $122,000 .....................................Ans (2) ------------------------ 3. Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 54% variable and 46% fixed. Present COGS = $2100,000 New Var COGS = 54%*$2100,000 = $1134,000 New COGS FC = 46%*2100,000 = $966,000 SO Income Stateet will look as below :- Sales $2,400,000 Less Var cost : COGS $1134,000 Selling exp $72,000 Admin Exp $48,000 ------------------------- Total COnt $1146,000 Less Fixed cost COGS $966,000 Selling exp $168,000 Admin exp $152,000 ------------------------------- Net Loss $140,000 .....................................Ans (3) ------------------------ So Option (1) is Besy which gives a Profit

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