Problem 223A Tanek Corps sales slumped badly in 2017 For the

Problem 22-3A Tanek Corp.\'s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company\'s income statement showed the following results from selling 585,500 units of product: sales $2,927,500, total costs and expenses $3,044,600, and net loss $117,100. Costs and expenses consisted of the amounts shown below Total Variable Fixed Cost of goods sold Selling expenses Administrative expenses $2,505,940 $1,861,890 $644,050 107,732185,018 166,282 $3,044,600 $2,049,250 $995,350 292,750 245,910 79,628 Management is considering the following independent alternatives for 2018 I. Increase unit selling price 21% with no change in costs, expenses, and sales volume 2. Change the compensation of salespersons from fixed annual salaries totaling $175,650 to total salaries of $70,260 plus a 5% commission on sales. (a) Compute the break-even point in dollars for 2017. (Round final answer to 0 decimal places, e.g. 1,225.) Break-even point s (b) Compute the contribution margin under each of the alternative courses of action. (Round final answer to 0 decimal places, e.g. 1,225.) Contribution margin for alternative 1 Contribution margin for alternative 2 Compute the break-even point in dollars under each of the alternative courses of action. (Round selling price per unit to 2 decimal places, e.g. 5.25 and other calculations to 0 decimal places, e.g. 20% and also final answer to 0 decimal places, eg. 1,225.) Break-even point for alternative 1 s Break-even point for alternative 2 Which course of action do you recommend?

Solution

Answer

Working

Units

Amount

Per unit

A

Sales

585500

2927500

5

(less) Variable Costs

B

Cost of Goods Sold

585500

1861890

3.18

C

Selling Expenses

585500

107732

0.184

D

Administrative expenses

585500

79628

0.136

E=B+C+D

Total Var Cost

585500

2049250

3.5

F=A-E

Contribution Margin

585500

878250

1.5

(less) Fixed expenses

G

Cost of Goods Sold

644050

H

Selling Expenses

185018

I

Administrative expenses

166282

J=G+H+I

Total Fixed expenses

995350

K=F-J

Net Income(Loss)

(117100)

A

Total Fixed expenses (from above)

995350.00

B

Contribution Margin per unit (from above)

1.50

C=A/B

Break Even point in units

663566.67

D

Sale Price per unit (from above)

5.00

E=C x D

Break Even point in dollars

$ 3317833

Working

Units (A)

Amount (A x B)

Per unit (B)

A

Sales at new Sales price

585500

3542275

6.05 [5 + (5 x 21%)]

(less) Variable Costs

B

Cost of Goods Sold

585500

1861890

3.18

C

Selling Expenses

585500

107732

0.184

D

Administrative expenses

585500

79628

0.136

E=B+C+D

Total Var Cost

585500

2049250

3.5

F=A-E

Contribution Margin

585500

1493025

2.55

(less) Fixed expenses

G

Cost of Goods Sold

644050

H

Selling Expenses

185018

I

Administrative expenses

166282

J=G+H+I

Total Fixed expenses

995350

K=F-J

Net Income(Loss)

497675

Contribution margin for alternative 1

Contribution per unit

2.55

Sale Price

6.05

Contribution margin for Alt 1 [2.55/6.05]

42%

Break Even point in dollars

Total fixed expenses

995350

Contribution margin for Alt 1

42%

Break Even point in dollar [995350/42%]

2369880.95

Working

Units

Amount

Per unit

A

Sales

585500

2927500

5

(less) Variable Costs

B

Cost of Goods Sold

585500

1861890

3.18

C

Selling Expenses

585500

107732

0.184

D=A x 5%

Commission on sales

585500

146375

0.25

E

Administrative expenses

585500

79628

0.136

F=B+C+D+E

Total Var Cost

585500

2195625

3.75

G=A-F

Contribution Margin

585500

731875

1.25

(less) Fixed expenses

H

Cost of Goods Sold

644050

I

Selling Expenses

[185018-175650+70260]

79628

J

Administrative expenses

166282

K=H+I+J

Total Fixed expenses

889960

L=G-K

Net Income(Loss)

(158085)

Contribution margin for alternative 2

Contribution per unit

1.25

Sale Price

5

Contribution margin for Alt 2 [1.25/5]

25%

Break Even point in dollars

Total fixed expenses

889960

Contribution margin for Alt 1

25%

Break Even point in dollar [889960/25%]

3559840.00

Answer: Alternative 1, as increasing sales price without incurring any extra cost is a good strategy. Provided that increased sales price don’t result in fall in demand for the product concerned.

Working		Units	Amount	Per unit
A	Sales	585500	2927500	5
	(less) Variable Costs
B	Cost of Goods Sold	585500	1861890	3.18
C	Selling Expenses	585500	107732	0.184
D	Administrative expenses	585500	79628	0.136
E=B+C+D	Total Var Cost	585500	2049250	3.5
F=A-E	Contribution Margin	585500	878250	1.5
	(less) Fixed expenses
G	Cost of Goods Sold		644050
H	Selling Expenses		185018
I	Administrative expenses		166282
J=G+H+I	Total Fixed expenses		995350
K=F-J	Net Income(Loss)		(117100)