Dousmann Corp.\'s sales slumped badly in 2014. For the first time in its history

Question

Dousmann Corp.'s sales slumped badly in 2014. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 696,000 units of product: sales $2,784,000; total costs and expenses $2,946,400; and net loss $162,400. Costs and expenses consisted of the amounts shown below Total Variable Fixed Cost of goods sold Selling expenses Administrative expenses $2,436,000 $1,670,400 83,520 55,680 $765,600 194,880 176,320 $2,946,400 $1,809,600 $1,136,800 278,400 232,000 Management is considering the following independent alternatives for 2015 I. Increase unit selling price 21% with no change in costs, expenses, and sales volume 2. Change the compensation of salespersons from fixed annual salaries totaling $174,000 to total salaries of $69,600 plus a 5% commission on sales (a) Compute the break-even point in dollars for 2014. (Round final answer to 0 decimal places, e.g. 1,225.) Break-even point (b) Compute the contribution margin under each of the alternative courses of action. (Round final answers to 0 decimal places, e.g. 1,225.) Contribution margin for alterna Contribution margin for alternative 2 tive 1

Explanation / Answer

Solution.

Calculation of break even point.

Breakeven point = Fixed cost / Contribution margin

= $1,136,800 / 35%

= $3,248,000.

b. Calculation of contribution margin.

Alternative 1.

Alternative 2.

c. Calculation of breakeven point

Alternative 1.

Breakeven point = $1,136,800 / 46.28%

= $245,635.26

Alternative 2.

Breakeven point = $1,011,520/ 33%%

= $3,065,212.12

Particular Variable cost Fixed Cost Cost of goods sold               1,670,400                  765,600 Selling Expenses                     83,520                  194,880 Administrative Cost                     55,680                  176,320 Total               1,809,600               1,136,800 Unit                   696,000                  696,000 Per unit                          2.60                         1.63

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