FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Transcribed Image Text:Midlands Inc. had a bad year in 2019. For the first time in its history, it operated at a loss. The company's income statement showed the
following results from selling 80,000 units of product: net sales $2,000,000; total costs and expenses $2,235,000; and net loss
$235,000. Costs and expenses consisted of the following.
Total
Variable
Fixed
Cost of goods sold
$1,568,000
$1,050,000
$518,000
Selling expenses
517,000
92,000
425,000
Administrative expenses
150,000
58,000
92,000
$2,235,000
$1,200,000 $1,035,000
Management is considering the following independent alternatives for 2020.
1.
Increase unit selling price 25% with no change in costs and expenses.
2.
3.
Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $40,000 plus a 5%
commission on net sales.
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 2019. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answer to 0
decimal places, e.g. 2,510.)
Break-even point $
(b) Compute the break-even point in dollars under each of the alternative courses of action for 2020. (Round contribution margin ratio to
3 decimal places e.g. 0.251 and final answers to O decimal places, e.g. 2,510.)
1. Increase selling price
$
2.
Change compensation
$
3.
Purchase machinery
$
Break-even point
Which course of action do you recommend?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step 1: Introduction to cost-volume-profit (CVP) analysis:
VIEW Step 2: Requirement a- Calculation of break-even point in dollars for 2019:
VIEW Step 3: Requirement b1- Calculation of break-even point in dollar based on increase selling price:
VIEW Step 4: Requirement b2- Calculation of break-even point in dollar based on change compensation:
VIEW Step 5: Requirement b3- Calculation of break-even point in dollar based on purchase of machinery:
VIEW Step 6: Recommendation of course of action between b1, b2 and b3:
VIEW Solution
VIEW 
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