232 5 Cost-Volume-Profit

Managerial Analysis

BYP5-3 The condensed income statement for the Peri and Paul partnership for 2014 is as follows.

Peri and Paul Company Income Statement For the Year Ended December 31, 2014

Sales (240,000 units) Cost of goods sold

Gross profit Operating expenses Selling $280,000 Administrative 150,000 430,000

Net loss ($30,000)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 50% of the selling expenses are variable, and 25% of the administrative expenses are variable.

Instructions

(Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.)

(a) Compute the break-even point in total sales dollars and in units for 2014.

(b) Peri has proposed a plan to get the partnership out of the red and improve its profitability.

She feels that the quality of the product could be substantially improved by spending $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $5.25 because of competitive pressures. Peri estimates that sales volume will increase by 25%. What effect would Peris plan have on the profits and the break-even point in dollars of the partnership? (Round the contribution margin ratio to two decimal places.)

(c) 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 Peris: (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. What effect would Pauls plan have on the profits and the break-even point in dollars of the partnership?

(d) Which plan should be accepted? Explain your answer.