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Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 76,500 units of product: Net sales $1,484,100; total costs and expenses $1,722,200; and net loss $238,100. Costs and expenses consisted of the following.

  
Total
 
Variable
 
Fixed
Cost of goods sold $1,198,300 $775,600 $422,700
Selling expenses 420,800 78,000 342,800
Administrative expenses 103,100 41,000 62,100
  $1,722,200 $894,600 $827,600


Management is considering the following independent alternatives for 2014.

1. Increase unit selling price 24% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $195,100 to total salaries of $38,800 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 2014. (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 
$[removed]


(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
1. Increase selling price 
$[removed]
2. Change compensation 
$[removed]
3. Purchase machinery 
$[removed]


Which course of action do you recommend? 

    • 8 years ago
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