Break-even; alternative cost structures.

The income statement for Menage Industries for 2015 is as follows:

Menage Industries

Income statement for year ending 31 December 2015

Sales revenue(200,000 units) $2,000,000

Cost of sales $1,200,000

Gross Profit800,000

Operating costs:

Marketing and distribution $460,000

Adminstration440,000900,000

Profit(loss) $(100,000)

Cost behavior seems to follow this pattern: all of the cost of sales is considered variable; 50 per cent of the total marketing and distribution costs are variable; and 40 per cent of the totaladministrationcosts are variable.

Required:

A. Calculate the number of units that are needed to be sold in 2015 to break-even.

B. The finance managerhas developed a number of alternative plans to get the entity back into profitability. One of the plans relates to switching to a more reliable supplier of raw materials which will increase the cost of sales per unit $.80. A change in the marketing strategy will decrease by $60,000. Competitive forceswould allow an increase in selling price of only $.50 per unit. On the informationavailable, would you advise a switch to this alternative plan?

C. Preparean income statementforboth alternativesgiven in(b)

D. Explain the concept of operating leverage as it relates to your answer in (b)