Gorham Manufacturing’s sales slumped badly in 2010. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 600,000 units of product: Net sales $2,400,000; total costs and expenses 2,540,000; and net loss $140,000. Costs and expenses consisted of the amounts shown below.

Management is considering the following independent alternatives for 2011.

1. Increase unit selling price 20% with no change in costs, 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 3% commission on net sales.

3. Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 54% variable and 46% fixed.

Instructions

(a) Compute the break-even point in dollars for 2010.

(b) Compute the break-even point in dollars under each of the alternative courses of action.

(Round all ratios to nearest full percent.) Which course of action do you recommend?

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Total $2,100,000 240,000 200,000 Variable Fixed Cost of goods sold Selling expenses Administrative expenses $1,440,000 72,000 $660,000 152,000 $1,560,000 $2,540,000 $980,000