Question

Compute break-even point under alternative courses of action

P22.4 (LO 4), E Tanek Corp.'s sales slumped badly in 2022. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 500,000 units of product: sales $2,500,000, total costs and expenses $2,590,000, and net loss $90,000. Costs and expenses consisted of the following amounts. Total variable fixed
Cosst of good sold $2,140,000 $1,590,000 $550,000
Selling expenses 250,000 92,000 158,000
Administrative expenses 200,000 68,000 132,000
$2,590,000 $1,750,000 $840,000
Management is considering the following independent alternatives for 2023. 1. Increase the unit selling price 20% with no change in total costs, total expenses, and sales volume. 2. Change the compensation of sales personnel from fixed annual salaries totaling $140,000 to total salaries of $60,000 plus a 5% commission on sales. All other total costs, total expenses, and total sales remain unchanged.
Instructions a. Compute the break-even point in sales dollars for 2022.
b. Compute the break-even point in sales dollars under each of the alternative courses of action. b. (Round all ratios to nearest full percent.) Which course of action do you recommend?

Answer 1

a. The break-even point in sales dollars for 2022 is:

Sales = Variable costs + Fixed costs + Profit
Sales = $2,140,000 + $840,000 + $0
Sales = $2,980,000

b. Alternative 1:
Sales = $2,500,000 x 1.2 = $3,000,000
Break-even point = ($1,590,000 + $158,000 + $132,000 + $840,000) / ($3,000,000 x 0.8) = 1.32 or 132%

Alternative 2:
Total salaries = $60,000 + 0.05 x $2,500,000 = $185,000
Fixed costs = $550,000 + $92,000 + $132,000 + $140,000 - $60,000 = $854,000
Variable costs = $1,590,000
Break-even point = ($1,590,000 + $854,000) / ($2,500,000 x 0.95) = 1.27 or 127%

I recommend alternative 2, because it has a lower break-even point and is more likely to generate a profit!