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2021 Income Statement is as follows: Revenues 6,875,000 Cost of goods sold 4,200,000 Selling expenses 550,000 Administrative expenses 750,000 Operating Income 1,375,000 Additional data are
2021 Income Statement is as follows: Revenues 6,875,000 Cost of goods sold 4,200,000 Selling expenses 550,000 Administrative expenses 750,000 Operating Income 1,375,000 Additional data are as follows: 275,000 units were sold. Total costs composed of 50% Variable Costs. The rest are Fixed Costs. Management is planning to implement some changes for year 2022. They will retain the original selling price, but the ratio between the Variable costs and Fixed Costs would change to 40% and 60% respectively. Because the economy is getting better, there is an expected increase of 150,000 units to be sold whether management implements the change or not. Answer the following: a.) Compute the break-even point in units in 2021. b.) Compute the break-even point in units if they applied their changes in 2021. (No typo here. Use 2021 data for comparability reasons.) c.) If you are the owner of the firm and you are NOT certain if the economy is indeed improving, which is the better option (a or b)? Explain why in 1-2 sentences. d.) If the economic prediction for 2022 is correct, would the company be better off with the existing cost structure or the new one the management is planning to implement? Show your solutions
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