Giere Manufacturing had a bad year in 2011. For the first time in its history it

Question

Giere Manufacturing had a bad year in 2011. For the first time in its history it operated at a loss. The company's income statement showed the following results from selling 80,000 units of product: Net sales $1,600,000; total costs and expenses $1,740,000; and net loss $140,000. Costs and expenses consisted of the following.
Total Variable Fixed
Cost of goods sold $1,200,000 $780,000 $420,000
Selling expenses 420,000 75,000 345,000
Administrative expenses 120,000 45,000 75,000
____________________________________________________
$1,740,000 $900,000 $840,000



Management is considering the following independent alternatives for 2012.



Compute the break-even point in dollars under each of the alternative courses of action. (Round answers to 0 decimal places, e.g. 125. For computational of unit costs and contribution margin ratios, round to 4 decimal places, e.g. 10.2520. Round all other computations to 0 decimal places, e.g. 125.)
3. Purchase machinery $______

Explanation / Answer

1. Increase selling price ================== Unit selling price after 25% hike = $1,600,000 *1.25 / 80,000 = $25.00 Less : Unit Variable Cost = $900,000 / 80,000 = $11.25 ------------ Contribution Margin = $13.75 BEP (Units) = $840,000/$13.75 ======== = 61,091 units 1. Increase selling price BEP dolloars = $61,091 x 25 = 1,527,275 Check = $1,527,275 - ($11.25 x 61,091) - $840,000 = $1,527,275 - $687,274 - $840,000 = 1 ____________________________________________________________________________________________ 2. Change Compensation =================== Unit Selling Price = $20.00 Less : Variable Cost ( 11.75 + 5% of $20) = $12.75 --------- Contribution Margin = $7.25 ====== Revised Fixed Cost ($840,000 - $200,000 + $40,000) $680,000 BEP ( units) $680,000 / $7.25 = 93,793 units 2. Change Compensation BEP (Dollars) = 93,793 x 20 = $1,875,860 Check = $1,875,860 - ($12.75 x 93,793) - $680,000 = $1,875,860 - $1,195,860 - $680,000 = 0 ____________________________________________________________________________________________ 3. Purchase Machinery Revised Variable Cost(50%) + Revised Fixed Cost (50%) = $1,740,000 / 2 = $870,000 + $870,000 Unit Selling Price $20.000 Less : Variable Cost ( $870,000 / 80,000) $10.875 --------- Contribution Margin $9.125 ====== Revised Fixed Cost $870,000 BEP ( units) $870,000 / $9.125 = 95,342 units BEP (Dollars) 95,342 x 20 = $1,906,840 Check = $1,906,840 - ($10.875 x 95,342 ) - $870,000 = $1,906,840 - $1,036,840 - $870,000 = 0 ____________________________________________________________________________________________ Answer to be filled in as follows : 1. Increase selling price $1,527,275 2. Change compensation $1,875,860 3. Purchase machinery $1,906,840 Which alternative is the recommended course of action? The best suited option is Increase in selling price by 25% subject to market response that should not drop below 61,091 units.

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