Fredonia Inc. had a bad year in 2013. For the first time in its history, it oper

Question

Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 77,200 units of product: Net sales $1,474,520; total costs and expenses $1,743,400; and net loss $268,880. Costs and expenses consisted of the following. Management is considering the following independent alternatives for 2014. Increase unit selling price 21% with no change in costs and expenses. Change the compensation of salespersons from fixed annual salaries totaling $201,900 to total salaries of $40,600 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 for 2014. Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend?

Explanation / Answer

A)

Sales      : $1474520

Less variable cost : 906,600

Contribution            : $567,920

Less FC                   :836,800

P.V ratio = Contribution / sales : 567,920/1474520 =38.5155

Break even point= Fixed cost / PV ratio = 836,800/ 38.5155 = $2,172,631.798

B)

Increase in selling price

PV ratio= 877,569.2 / 1,784,169.2 *100 = 49.1864

BEP $ =836,800/0.491864 = $1,701,283.282

Change compensation

Change in VC= 1474520 *0.05 =$73,726

PV ratio =568794/ 1,474,520=38.5748%

BEP $ =675500/0.385748 = $1,751,143.233

Purchase Machinery

Change in VC and FC

Change in VC= (1,205,600/2)+74,600+48,500 = $725,900

Change in FC =836,800-422,100+(1,205,600/2) = $1,017,500

PV ratio =748,620/ 1,474,520=50.7704%

BEP $ =1,017,500/0.507704 = $2,004,120.511

sales(1474520*1.21) $1,784,169.2 Less variable cost 906,600 Contribution $877,569.2 Less FC 836,800

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