Broadening Your Perspective 5-2 (Part Level Submission)

The condensed income statement for the Peri and Paul partnership for 2017 is as follows.

PERI AND PAUL COMPANY Income Statement For the Year Ended December 31, 2017 Sales (240,000 units) $1,200,000 Cost of goods sold 800,000 Gross profit 400,000 Operating expenses Selling $280,000 Administrative 150,000 430,000 Net loss $(30,000 )

A cost behavior analysis indicates that 65% of the cost of goods sold are variable, 39% of the selling expenses are variable, and 45% of the administrative expenses are variable. (Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.)

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 $0.55 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? (