Fredonia Inc. had a bad year in 2013. For the first time in its history (A+ Guaranteed)

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 80,000 units of product: Net sales $2,000,000; total costs and expenses $2,135,000; and net loss $135,000. Costs and expenses consisted of the following.

Total

Variable

Fixed

Cost of goods sold

$1,468,000

$950,000

$518,000

Selling expenses

517,000

92,000

425,000

Administrative expenses

150,000

58,000

92,000

$2,135,000

$1,100,000

$1,035,000

Management is considering the following independent alternatives for 2014.

1.

Increase unit selling price 25% with no change in costs and expenses.

2.

Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $40,000 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. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

Break-even point

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(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

Here’s the SOLUTION

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