Expand Your Critical Thinking 18-02

The condensed income statement for the Ivanhoe and Paul partnership for 2020 is as follows.

Ivanhoe and Paul Company Income Statement For the Year Ended December 31, 2020
Sales (300,000 units)				$1,500,000
Cost of goods sold				1,000,000
Gross profit				500,000
Operating expenses
Selling		$350,000
Administrative		195,000
				545,000
Net loss				$(45,000	)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.

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Compute the break-even point in total sales dollars for 2020. (Round intermediate calculations to 2 decimal places, e.g. 15.25 and final answers to 0 decimal places, e.g. 2,520.)

Break-even point in dollars

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Ivanhoe 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. Ivanhoe estimates that sales volume will increase by 25%. Compute the net income under Ivanhoe's proposal and the break-even point in dollars. (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.)

		Amount
Net income		$
Break-even point		$

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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 Ivanhoes: (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 $49,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. Compute the net income under Pauls proposal and the break-even point in dollars. (Round intermediate calculations to 4 decimal places, e.g. 15.2515 and final answers to 0 decimal places, e.g. 2,520.)

		Amount
Net income		$
Break-even point		$

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Which plan should be accepted?

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Ivanhoes planPauls plan

should be accepted.

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