Expand Your Critical Thinking 18-02

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

Ivanhoeand Paul Company

Income Statement

For the Year Ended December 31, 2020

Sales (240,000 units)$1,200,000Cost of goods sold768,000Gross profit432,000Operating expensesSelling$280,000Administrative186,000466,000Net loss$(34,000)

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$ answer here

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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.)

AmountNet 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 Ivanhoe's: (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 $48,000. 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 Paul'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.)

AmountNet income$

Break-even point$