Tanek Corp.\'s sales slumped badly in 2017. For the first time in its history, i

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 560,500 units of product: sales $2,802,500, total costs and expenses $2,914,600, and net loss $112,100. Costs and expenses consisted of the amounts shown below. Total Variable Fixed y Cost of goods sold $2,398,940 $1,782,390 $616,550 103,132 177,118 76,228159,182 $2,914,600 $1,961,750 $952,850 Selling expenses Administrative expenses 280,250 235,410 Management is considering the following independent alternatives for 2018. 1. Increase unit selling price 21% with no change in costs, expenses, and sales volume. 2. Change the compensation of salespersons from fired annual salaries totaling $168,150 to total salaries of $67,260 plus a 5% commission on sales. (a) Compute the break-even point in dollars for 2017. (Round final answer to O 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 o decimal places, e.g. 1,22s) Contribution margin for alternative 1 Contribution margin for alternative 2

Explanation / Answer

                                               Total                        Variable                  Fixed
Cost of goods sold           $2398940                   $1782390             $616550
Selling expenses                    280250                         103132              177118
Administrative expenses      235410                         76228                 159182
                                              $2914600                    $1961750          $952850
1961750 / 560500 = $3.50 variable cost per unit
2802500 / 560500 = $5.00 sales price per unit
5.00 – 3.50/ 5.00 = .30 contribution margin ratio
952850/.30 = 3176167

b.

Alternative 1

Selling price per unit = 5.00 x 1.21 = 6.05

Contribution margin ratio = 6.05 – 3.50 /6.05 = 42%

Alternative 2

Variable cost per unit = 3.50 + 5.00 x 5% = 3.75

Contribution margin ratio = (5.00 – 3.75) / 5.00 = 25%

c.

Alternative 1

Break even point = 952850 /42% = 2268690

Alternative 2

Breakeven point = (952850 – 168150 + 67260 )/25% = 3407840

Which course of action do you recommend?
Alternative 1 does give you a larger contribution margin and a smaller breakeven point. So this would seem to be the better option. However, using Alternative 1 increases the selling price; therefore, total sales may fall. Alternative 2 increases sales commissions. This would give salespersons more of an incentive to increase total sales.

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