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 76,500 units of product: Net sales $1,484,100; total costs and expenses $1,722,200; and net loss $238,100. Costs and expenses consisted of the following.
| Total | Variable | Fixed | ||||
| Cost of goods sold | $1,198,300 | $775,600 | $422,700 | |||
| Selling expenses | 420,800 | 78,000 | 342,800 | |||
| Administrative expenses | 103,100 | 41,000 | 62,100 | |||
| $1,722,200 | $894,600 | $827,600 |
Management is considering the following independent alternatives for 2014.
| 1. | Increase unit selling price 24% with no change in costs and expenses. | |
| 2. | Change the compensation of salespersons from fixed annual salaries totaling $195,100 to total salaries of $38,800 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 | $ |
(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.)
| Break-even point | ||||
| 1. | Increase selling price | $ | ||
| 2. | Change compensation | $ | ||
| 3. | Purchase machinery | $ |
Which course of action do you recommend
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