Question
Gorham Manufacturing's sales slumped badly in 2020. For the first time in its history, it operated at a loss. The company's income statement showed the
Gorham Manufacturing's sales slumped badly in 2020. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling59,000units of product: net sales $1,711,000; total costs and expenses $1,885,784; and net loss $174,784. Costs and expenses consisted of the amounts shown below:
TotalVariableFixedCost of goods sold$1,246,784$917,480$329,304Selling expenses460,000126,000334,000Administrative expenses179,000
120,000
59,000
$1,885,784$1,163,480$722,304
Management is considering the following independent alternatives for 2021.
1.Increase the unit selling price by25% with no change in costs, expenses, or sales volume.2.Change the compensation of salespersons from fixed annual salaries totalling $204,000to total salaries of $19,000plus a 5% commission on net sales.3.Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50.
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