P18-3B Denton Manufacturing had a bad year in 2011. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 60,000 units of product: Net sales $1,500,000; total costs and expenses $1,890,000; and net loss $390,000. Costs and expenses consisted of the amounts shown below.
|
Total |
Variable |
Fixed |
|
|
Cost of goods sold |
$1,350,000 |
$930,000 |
$420,000 |
|
Selling expenses |
420,000 |
65,000 |
355,000 |
|
Administrative expenses |
120,000 |
55,000 |
65,000 |
|
$1,890,000 |
$1,050,000 |
$840,000 |
Management is considering the following independent alternatives for 2012.
1. Increase unit selling price 40% with no change in costs, expenses, and sales volume.
2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $30,000 plus a 4% 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.
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?