Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it
ID: 2544309 • Letter: T
Question
Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 580,500 units of product: sales $2,902,500, total costs and expenses $3,018,600, and net loss $116,100. Costs and expenses consisted of the amounts shown below.
Total variable fixed
cost of goods sold $2484540 $18459900 $638550
selling expense 290250 106812 183438
administrative expense 243810 78948 164862
$3018600 2031750 986850
Management is considering the following independent alternatives for 2018.
Increase unit selling price 20% with no change in costs, expenses, and sales volume.
Change the compensation of salespersons from fixed annual salaries totaling $174,150 to total salaries of $69,660 plus a 6% commission on sales.
(a) Compute the break-even point in dollars for 2017. (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 answer to 0 decimal places, e.g. 1,225.)
Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, e.g. 1,225.)
Which course of action do you recommend?
1.Increase unit selling price 20% with no change in costs, expenses, and sales volume.
Change the compensation of salespersons from fixed annual salaries totaling $174,150 to total salaries of $69,660 plus a 6% commission on sales.
(a) Compute the break-even point in dollars for 2017. (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 answer to 0 decimal places, e.g. 1,225.)
Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, e.g. 1,225.)
Which course of action do you recommend?
Explanation / Answer
Answer a Contribution Margin % for 2017 = Contribution Margin / Sales Contribution Margin = Sales - variable cost = $2902500 - $2031750 = $870750 Contribution Margin % for 2017 = $870750 / $2902500 = 30% Break even point in dollars = Fixed cost / Contribution Margin % = $986850 / 30% = $32,89,500 Answer b-1 Contribution Margin under alternative 1 Revised sales = $2902500 * 120% = $34,83,000 Revised Contribution Margin = Sales - Variable cost = $34,83,000 - $20,31,750 = $14,51,250 Contribution Margin % for alternative 1 = $1451250 / $3483000 = 42% Contribution Margin under alternative 2 Revised Fixed cost = $986850 - $174150 + $69660 = $8,82,360 Revised variable cost = $20,31,750 + (6% of $2902500) = $22,05,900 Revised Contribution Margin = Sales - Variable cost = $29,02,500 - $22,05,900 = $6,96,600 Contribution Margin % for alternative 2 = $6,96,600 / $29,02,500 = 24% Answer b-2 Break even point for alternative 1 = Fixed cost / Contribution margin % = $986850 / 42% = $23,68,440 Break even point for alternative 2 = Fixed cost / Contribution margin % = $882360 / 24% = $36,76,500 I would recommend a alternative 1 as it highest contribution margin and lower break even point.
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