Total Variable Fixed 120,000 45,000 75,000 $1,740,000 $900,000 $840,000 Manageme
ID: 2385750 • Letter: T
Question
Total
Variable
Fixed
120,000
45,000
75,000
$1,740,000
$900,000
$840,000
Management is considering the following independent alternatives for 2011.
$
Which alternative is the recommended course of action?
Cruz Manufacturing had a bad year in 2010. 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 2011.
- Increase unit selling price 25% with no change in costs and expenses.
- Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $40,000 plus a 5% commission on net sales.
- Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50.
Cruz Manufacturing had a bad year in 2010. 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 2011. Increase unit selling price 25% with no change in costs and expenses. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $40,000 plus a 5% commission on net sales. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50. Compute the break-even point in dollars under each of the alternative courses of action. (Round your answers to 0 decimal places, e.g. 1,250,100. For computational purposes round unit costs and contribution margin ratios to 4 decimal places, e.g. 0.2375. Round all other computations to 0 decimal places, e.g. 450,000.) 1. Increase selling price $ 2. Change compensation $ 3. Purchase machinery $ Which alternative is the recommended course of action? Compute the break-even point in dollars for 2010. (Round your answers to 0 decimal places, e.g. 1,200,100. For computational purposes round unit costs and contribution margin ratios to 4 decimal places, e.g. 0.2550. Round all other computations to 0 decimal places, e.g. 50,000.) $
Explanation / Answer
According to the given information, Net sales = $1,600,000 Costs and expenses = $1,740,000 Net loss = $140,000 Units sold = 80,000 Unit selling price = Net sales / Numbe of units sold = $1,600,000 / 80,000 = $20 Management is considering three alternatives for 2011: 1) Increasing the unit selling price by 25% with no change in costs and expenses. New selling price = $20 (1.25) = $25 Total sales = New selling price * Units sold = $25 * 80,000 = $2,000,000 Now computing the Break-even sales in dollars: Break-even sales in dollars = Fixed costs / Contribution margin ratio But Contribution margin ratio = Contribution margin per unit / Selling price per unit To calculate the contribution margin per unit, we have to find out the variable cost per unit. VAriable cost per unit = Total variable costs / Units sold = $900,000 / 80,000 = $11.25 Total fixed costs = $840,000 Contribution margin per unit = Selling price per unit - Variable cost per unit = $25 - $11.25 = $13.75 Contribution margin ratio = $13.75 / $25 = 0.55 or 55% Break-even sales in dollars = $840,000 / 0.55 = $1,527,272.72 2) Here salaries of $40,000 is fixed and 5% commission on Net sales is a variable expense. 5% commission on net sales = 0.05 * $1,600,000 = $80,000 The effect of this alternative is fixed costs decrease by $160,000 Variable costs increase by $80,000 Total fixed costs = $840,000 - $160,000 = $680,000 Total variable costs = $900,000 + $80,000 = $980,000 Therefore, the contribution margin ration becomes: Contribution margin ratio = CM / Net sales = [$1,600,000 - $980,000 ] / $1,600,000 = $620,000 / $1,600,000 = 0.3875 or 38.75% Break-even sales dollars = Fixed costs / CM ratio = $680,000 / 0.3875 = $1,754,838.71 3) The effect of this alternative are: Variable and fixed cost becomes $600,000 each Total fixed costs = $600,000 + $345,000 + $75,000 = $1,020,000 Total variable costs = $600,000 + $75,000 + $45,000 = $720,000 Total fixed costs = $600,000 + $345,000 + $75,000 = $1,020,000 Total variable costs = $600,000 + $75,000 + $45,000 = $720,000 Therefore, the contribution margin ration becomes: Contribution margin ratio = CM / Net sales = [$1,600,000 - $720,000 ] / $1,600,000 = $880,000 / $1,600,000 = 0.55 or 55% Break-even sales dollars = Fixed costs / CM ratio Therefore, the contribution margin ration becomes: Contribution margin ratio = CM / Net sales = [$1,600,000 - $720,000 ] / $1,600,000 = $880,000 / $1,600,000 = 0.55 or 55% Break-even sales dollars = Fixed costs / CM ratio = $1,020,000 / 0.55 = $1,854,545.45 Therefore, the recommended alternative is Alternative-1 because it has the lower break-even sales dollars.Related Questions
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