Peri and Paul Company

Income Statement

For the Year Ended December 31, 2022

Sales (240,000 units) $1,200,000

Cost of goods sold 800,000

Gross profit 400,000

Operating expenses

Selling $300,000

Administrative 152,500 452,500

Net loss $ (52,500)

A cost behavior analysis indicates that 75% of the cost of goods sold are variable and 40% of the selling expenses are variable. Administrative expenses are $92,500 fixed.

Instructions

(Round to nearest unit, cent, and percentage, where necessary. Use the CVP income statement format in computing net income.)

a) Compute the break-even point in sales dollars and in sales units for 2022.

b) Peri 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 $0.32 more per unit on better raw materials. The unit selling price could be increased to $5.25. Peri estimates that sales volume would increase by 25%. Compute net income under Peris proposal and the break-even point in sales dollars.

c) 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 unit variable selling expenses to $0.575, (2) lower the unit selling price by $0.25, and (3) increase fixed selling expenses by $51,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. Compute net income under Pauls proposal and the break-even point in sales dollars.

d) Which plan should be accepted? Explain your answer.