Magic Manufacturing's sales slumped badly in 2012. For the first time in its history, itoperated at a loss. The company's income statement showed the following results from selling 600,000 units of product: Net sales $2,400,000; total costs and expenses $2,540,000; and net loss $140,000. Costs and expenses consisted of the amounts shown below.
|
Total
|
Variable
|
Fixed
|
|
Cost of goods sold
|
$2,100,000
|
$1,440,000
|
$660,000
|
|
Selling expenses
|
240,000
|
72,000
|
168,000
|
|
Administrative expenses
|
200,000
|
48,000
|
152,000
|
|
$2,540,000
|
$1,560,000
|
$980,000
|
Management is considering the following independent alternatives for 2013.
1. Increase unit selling price 20% with no change in costs, expenses, and sales volume.
2. Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 3% commission on net sales.
3. Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 54% variable and 46% fixed.
Instructions
(a) Compute the break-even point in dollars for 2012.
(b) Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend?