Kimmel, Accounting, 6e CALCULATOR PHINTER VERSION BACK NEXT Problem 19-1A Your a
ID: 2551015 • Letter: K
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Kimmel, Accounting, 6e CALCULATOR PHINTER VERSION BACK NEXT Problem 19-1A Your answer is partially correct. Try again. Hidlands Inc. had a bad yer in 2016. For the first time in its history, it operated at a loss. The company's Income statement sh ales $1,500,000; total costs and expenses $1,620,000; and net loss $120,000. Costs and expenses consisted ncome statement showed the following results from selling 75,000 units of product: net Total Varlable Flxed Cost of goods sold Selling expenses Administrative expenses $956,000 516,000 148,000 $1,620,000 $451,000 91,000 58,000 $600,000 $505,000 425,000 90,000 $1,020,000 tanagement is considering the following independent alternatives for 2017 Increase unit selling price 30% with no change in costs and expenses. Cange the compensation of salespersons from fixed annual salaries totaling $205,000 to total salaries of S35.000 plus a 5% commission on net sales. Purchase new high-tech factory machinery that will change the proportion between variable and foxed cost of goods soid to 50:50 a) Compute the break-even point in dollars for 2017. (Round contribution margin ratio to 2 decimal places e.g. 0.25 and final answer to 0 decimal places, eg·2510.) reak-even point b Computethe break even point in dollars under eac or the a ternative courses of action. (Round contribution margin ratio to 4 dec mal places eg asi 2 and nna, ans ers to 1,700,000 ecimal places, e.g. 2,510.) Break-even point . Increase selling price Change compensation Purchase machinery hich course of action do you recommend? LINK TO TEXTExplanation / Answer
a)Computation of break even point in dollors for 2017
Break even point in units = Fixed Cost / (Sales price per unit-Variable cost per unit)
Fixed Cost = $1,020,000
Sales Price per unit = Sales/units of sales
=1,500,000/75,000=$20 per unit
Variable costs per unit = $600,000/75000 = $8 Per unit
Therefore Break Even Point in units= $1,020,000/(20-8)= 85,000 Units
Break Even Point = 85000*20 =$1,700,000
b)Computation of Break Even Point for each alternative course of action.
1)Increase unit selling price to 30% with not change in total cost or expenses.
New Selling Price = 20 + 30% =20+6= $26
New Contribution= 26-8= $18 per unit
Break Even Point in units = $1,020,000/18 =56,666.6667 units
Break Even Poing in value = 56,666.6667 x 26 =$1,473,333
2)Change in the compensation of sales person,
New Fixed Cost= $1,020,000-205,000+35000=$850,000
New Variable Cost per unit = 8 + 20*5% = $9 per unit
Contribution per unit = 20-9= $11 per unit
Break Even point in units = $850,000/11= 77,272.7273 units
Break Even Point sales = 77,272.7273 x 20 =$1,545,455
3)Purchase of new hightech factory machinery
Assuming there is no change in the variable cost the new fixed cost for 75000 unit of sales =
Cost of goods sold $451,000
Selling Expenses $425,000
Administrative Expense $ 90,000
Total Fixed Cost =$966,000
Break Even Sales in units =$966,000/12 =80,500 units
Break Even Sales = 80,500 X $20 = $1,610,000
I will go for option one because break even point can be reached faster and the contribution per unit is more in this option.
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