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 150,000 450,000

Net loss $ (50,000)

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

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

a. Compute the break-even point in total sales dollars and in 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 $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $5.25 because of competitive pressures. Peri estimates that sales volume will increase by 25%. Compute net income under Peris proposal and the break-even point in dollars. (Round the contribution margin ratio to three decimal places.)

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 Peri'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 $40,000. 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 dollars. (Round the contribution margin ratio to three decimal places.)

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