Expand Your Critical Thinking 18-02

The condensed income statement for the Blossom and Paul partnership for 2020 is as follows.

Blossom and Paul Company

Income Statement

For the Year Ended December 31, 2020

Sales (250,000 units)

$1,250,000

Cost of goods sold

900,000

Gross profit

350,000

Operating expenses

Selling

$250,000

Administrative

112,500

362,500

Net loss

$(12,500)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.

Paul was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Blossom's: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling expenses by $40,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. Compute the net income under Paul's proposal and the break-even point in dollars. (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.)

Amount

Net income

$

Break-even point

$

Answer:

Net income is $34500

break even point in dollar is 1771973.25

Step-by-step explanation

Calculation of Each cost and sales price per unit:

per unit = Total amount/Total units

Sales price per unit = Total sales/units

=1250000/250000

=$5

Variable cost of goods sold =900000*75%

=675000

Variable cost per unit cost = 675000/250000

=$ 2.7

Fixed cost of goods sold =900000*(1-25%)

=225000

Variable selling expenses = 250000*42%

=105000

Variable selling expenses per unit = 105000/250000

=0.42

Fixed selling expenses = 250000*(1-42%)

=145000

Variable Administrative expenses = (112500*40%)

=45000

Variable administrative expenses per unit = 45000/250000

=0.18

Fixed administrative expenses = (112500*(1-40%))

=67500

New variable selling expenses = $0.59

New selling expenses per unit = 5-0.25 = 4.75

New fixed selling expenses = 145000+40000

=185000

Sales increases by 60%

Sales = 250000*(1+60%)

= 400000

Calculation of Net income under proposed structure:

Sales (400000*4.75)................................................1900000

less: Variable cost of goods sold(400000*2.7).........-1080000

less: fixed cost of goods sold....................................-225000

less: variable selling exp. (400000*0.59)...................-236000

less: fixed selling expenses........................................-185000

less: Variable administrative exp. (400000*0.18)........-72000

less: fixed administrative exp. -67500

Net income 34500

So Net income is $34500

Breakeven point in units = Total fixed cost/(sales price - all variable cost per unit)

(225000+185000+67500)/(4.75-2.7-0.59-0.18)

=373047

in $ = break even point in unit*Sales price

=373047*4.75

=1771973.25

So break even point in dollar is 1771973.25