Olgivie Company had a bad year in 2013. For the first time in its history, it op

Question

Olgivie Company 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 60,000 units of product: sales $1,800,000; total costs and expenses $2,010,000; and net loss $210,000. Costs and expenses consisted of the amounts shown below.

Management is considering the following independent alternatives for 2014.
1. Increase unit selling price 25% with no change in costs, expenses, and sales volume.
2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $20,000 plus a 5% commission on net sales.
3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50.

Instructions
(a) Compute the break-even point in dollars for 2013.
(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round all ratios to nearest full percent.) Which course of action do yourecommend?

Explanation / Answer

a) Calculation of Break Even Point in 2013 Sales Amount in $     1,800,000 Less :-Variable Cost Amount in $     1,170,000 Contribution (a) Amount in $         630,000 Quantity Sold (b) Units           60,000 Contribution per unit (c )= (a)/(b) Amount in $              10.50 Fixed Cost (d) Amount in $         840,000 Break Even Points in Sales (e )= (d)/( c) Units Fixed cost/Contribuiton per unit Therefore Break even Point in Units (e ) Units           80,000 Sales Price per Unit (f) Amount in $ 30.00 Break Even Points in $ (g) = (e ) X (f) Amount in $ BEP in sales X Sales price per Unit Break Even Points in $ Amount in $     2,400,000 (b) (1) Increase unit selling price 25% with no change in costs, expenses, and sales volume Selling Price per Unit after increasing by 25% Amount in $ 37.50 ( 30 X 125%) Revised sales Value Amount in $     2,250,000 Less :-Variable Cost Amount in $     1,170,000 Contribution (a) Amount in $     1,080,000 Quantity Sold (b) Units           60,000 Contribution per unit (c )= (a)/(b) Amount in $              18.00 Fixed Cost (d) Amount in $         840,000 Break Even Points in Sales (e )= (d)/( c) Units Fixed cost/Contribuiton per unit Therefore Break even Point in Units (e ) Units           46,667 Sales Price per Unit (f) Amount in $ 37.50 Break Even Points in $ (g) = (e ) X (f) Amount in $ BEP in sales X Sales price per Unit Break Even Points in $ Amount in $     1,750,000 (b) (2) Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $20,000 plus a 5% commission on net sales. Sales Amount in $     1,800,000 Less :-Variable Cost Amount in $     1,170,000 Less:- 5 % commission on Sales Amount in $           90,000 Contribution (a) Amount in $         540,000 Quantity Sold (b) Units           60,000 Contribution per unit (c )= (a)/(b) Amount in $                9.00 Fixed Cost (d) Amount in $         860,000 ($ 840000+ $ 20000) Break Even Points in Sales (e )= (d)/( c) Units Fixed cost/Contribuiton per unit Therefore Break even Point in Units (e ) Units           95,556 Sales Price per Unit (f) Amount in $ 30.00 Break Even Points in $ (g) = (e ) X (f) Amount in $ BEP in sales X Sales price per Unit Break Even Points in $ Amount in $     2,866,667 (b) (3) Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50. Existing New Saving in Cost Fixed Cost of Cost of Goods Sold Amount in $         420,000        420,000                    -   Variable Cost of Cost of goods sold Amount in $         930,000        420,000        510,000 Cost of Goods Sold Amount in $     1,350,000        840,000        510,000 Sales Amount in $     1,800,000 Less :-Revised Variable Cost ($ 1170000-$ 510000) Amount in $         660,000 Contribution (a) Amount in $     1,140,000 Quantity Sold (b) Units           60,000 Contribution per unit (c )= (a)/(b) Amount in $              19.00 Fixed Cost (d) Amount in $         840,000 Break Even Points in Sales (e )= (d)/( c) Units Fixed cost/Contribuiton per unit Therefore Break even Point in Units (e ) Units           44,211 Sales Price per Unit (f) Amount in $ 30.00 Break Even Points in $ (g) = (e ) X (f) Amount in $ BEP in sales X Sales price per Unit Break Even Points in $ Amount in $     1,326,316

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