Problem - 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 75,900 units of product: Net sales $1,449,690; total costs and expenses $1,742,600; and net loss $292,910. Costs and expenses consisted of the following.
|
|
Total
|
Variable
|
Fixed
|
|
Cost of goods sold
|
$1,200,400
|
$778,000
|
$422,400
|
|
Selling expenses
|
418,500
|
73,000
|
345,500
|
|
Administrative expenses
|
123,700
|
53,100
|
70,600
|
|
|
$1,742,600
|
$904,100
|
$838,500
|
Management is considering the following independent alternatives for 2014.
1. Increase unit selling price 23% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $201,400 to total salaries of $42,700 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.
(b) Compute the break-even point in dollars under each of the alternative courses of action.
1. Increase selling price
2. Change compensation
3. Purchase machinery
Which course of action do you recommend?