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 500,000 units of product: sales $2,500,000, total costs and expenses $2,600,000, and net loss $100,000. costs and expenses consisted of the amounts shown below.
cost of good sold $2,140,000 $1,590, $550,000selling expenses 250,000 92,000 158,000administrative expenses 210,000 68,000 142,000totals $2,600,000 $1,750,000 $850,000management is considering the following independent alternatives for 2018.1) increase unit selling price 20% with no change in cost, expenses, and sales volume.2) change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 5% commission on salesa) compute the break-even point in dollars for 2017: break-even point $ ) compute the contribution margin under each of the alternative courses of action: contribution margin for alternative 1 %contribution margin for alternative 2 %compute hte break-even point in dollars under each of the alternative courses of action: break-even point for alternative 1 $ -even point for alternative 2 $

a) Break-even point in dollar for 2017

Contribution margin ratio = Contribution Margin/Sales

C.M Ratio = (Sales - Variable Cost)/Sales

C.M Ratio = $(2,500,000-1,750,000)/2,500,000

C.M Ratio = 0.30 or 30%

Break-even point in dollars = Fixed expense/C.M Ratio

B-E point ($) = $850,000/0.30

= $2,833,333.33

Alternative 1

Sales Price per unit after increasing 20%,

Sales Price = ($5*0.2) + $5 = $6

Total Sales ($) = (Sales Price x Sales Units)

Total Sales ($) = ($6*500,000) =$3,000,000

Contribution margin ratio = Contribution Margin/Sales

C.M Ratio = ($3,000,000- $1,750,000)/$3,000,000

C.M Ratio = 0.42 or 42%

Break-even point in dollars = Fixed expense/C.M Ratio

B-E point ($) = $850,000/0.42

= $2,023,809.52

Alternative 2

Commission = $2,500,000*5% = $125,000

Change in fixed annual salaries = $150,000-$60,000 = $90,000

Total fixed costs after deducting the changes in fixed salaries = $850,000-$90,000 = $760,000

Contribution margin ratio = Contribution Margin/Sales

C.M Ratio = (Sales - Variable Cost - Commission on sales)/Sales

C.M Ratio = ($2,500,000-$1,750,000-$125,000)/$2,500,000

C.M Ratio = 0.25 or 25%

Explanation:

Sales = $2,500,000

Sales Unit = $2,500,000/500,000 = $5

Variable Cost = 1,750,000

Fixed costs = $850,000

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