Wolf Broadcasting operated at the break-even point of $2,250,000 during year 1 w

Question

Wolf Broadcasting operated at the break-even point of $2,250,000 during year 1 while incurring costs of $1,00,000. Management is considering two alternatives to reduce the break even level. Alternative A trims fixed costs by $200,000 annually with no change in variable cost per unit; doing so, however, will reduce the quality of the product and result in a 10 percent decrease in selling price but no change in the number of units sold. Alternative B sustitutes automated equipment for certain operations now performed manually. Alternative B will result in an annual increase of $300,000 in fixed costs but a 5 percent decrease in variable costs per barrel produced, with no change in product quality, selling price, or sales volume. year 1? what was the total contribution margin (contribution margin per unit times number of units sold) during What is the break even point in sales dollars under alternative A? What is the break even point in sales dollars under alternative B? What should the company do?

Explanation / Answer

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Wolf Broad casting

Year 1. details

Amt $

Breakeven point Sales revenue

      2,250,000

Fixed cost

      1,000,000

Contribution margin at Breakeven sales=

      1,000,000

Variable cost in year 1

      1,250,000

Variable cost as % of sales

56%

Contribution margin %

44%

Alternative A

Sales price will reduce by  

10%

Variable cost remain unchanged

As selling price reduces;

Variable cost as % of sales =56%/90% =

62%

New Contribution margin =

38%

Reduced Fixed cost =

          800,000

Revised Breakeven point in $ sales =b/a=

$   2,105,263

Alternative B

Revised Variable cost =

51%

Revised Contribution margin=

49%

Revised Fixed cost=

      1,300,000

Revised Breakeven point in $ sales =b/a=

$   2,653,061

Alternative A has the lowest break even

sales in $ term , so the company should

accept alternative A for breakeven sales

Reduction.

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Hope that helps.

Feel free to comment if you need further assistance J

Wolf Broad casting

Year 1. details

Amt $

Breakeven point Sales revenue

      2,250,000

Fixed cost

      1,000,000

Contribution margin at Breakeven sales=

      1,000,000

Variable cost in year 1

      1,250,000

Variable cost as % of sales

56%

Contribution margin %

44%

Alternative A

Sales price will reduce by  

10%

Variable cost remain unchanged

As selling price reduces;

Variable cost as % of sales =56%/90% =

62%

New Contribution margin =

38%

Reduced Fixed cost =

          800,000

Revised Breakeven point in $ sales =b/a=

$   2,105,263

Alternative B

Revised Variable cost =

51%

Revised Contribution margin=

49%

Revised Fixed cost=

      1,300,000

Revised Breakeven point in $ sales =b/a=

$   2,653,061

Alternative A has the lowest break even

sales in $ term , so the company should

accept alternative A for breakeven sales

Reduction.

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