Gorham Manufacturing's sales slumped badly in 2010. For the first time in its history, it operated 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
Management is considering the following independent alternatives for 2011.Increase unit selling price 20% with no change in costs, expenses, and sales volume.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.Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 54% variable and 46% fixed.