Kimmel, Accounting, 6e
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Problem 19-1A
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Midlands Inc. had a bad year in 2016. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 75,000 units of product: net
sales $1,500,000; total costs and expenses $1,620,000; and net loss $120,000. Costs and expenses consisted of the following.
Cost of goods sold
Selling expenses
Administrative expenses
Total
Variable
Fixed
$956,000
$451,000
$505,000
516,000
91,000
425,000
148,000
58,000
90,000
$1,620,000
$600,000
$1,020,000
Management is considering the following independent alternatives for 2017.
1. Increase unit selling price 30% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $205,000 to total salaries of $35,000 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.
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, e.g. 2,510.)
Break-even point
1,700,000
b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0
decimal places, e.g. 2,510.)
Break-even point
Increase selling price
Change compensation
Purchase machinery
Which course of action do you recommend?
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