Tanck Manufacturing\'s sales slumped badly in 2011. For the first time in its hi

Question

Tanck Manufacturing's sales slumped badly 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 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 2012.

Increase unit selling price 20% with no change in costs, expenses, and sales volume.

Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 5% commission on net sales.

Explanation / Answer

(a) Sales were $2,400,000, variable expenses were $1,560,000 (65% of sales), and fixed expenses were $980,000. Therefore, the break-even point in dollars is:

$980,000 / .35 = $2,800,000

(b) 1. The effect of this alternative is to increase the selling price per unit to $4.80 ($4 X 120%). Total sales become $2,880,000 (600,000 X $4.80). Thus, the contribution margin ratio changes to 46% [($2,880,000 – $1,560,000) ÷ $2,880,000]. The new break-even point is:

$980,000 / .46 = $2,130,435 (rounded)

2. The effects of this alternative are to change total fixed costs to $890,000 ($980,000 – $90,000) and to change the contribution margin to 30% [($2,400,000 – $1,560,000 – $120,000) ÷ $2,400,000]. The new break-even point is:

$890,000 / .30 = $2,966,667 (rounded)

Alternative 1 is the recommended course of action because it has a lower break-even point.

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