Question
The condensed income statement for the Blossom and Paul partnership for 2020 is as follows. Sales (240,000 units) $1,200,000 Cost of goods sold 800,000 Gross
The condensed income statement for the Blossom and Paul partnership for 2020 is as follows.
Sales (240,000 units) | $1,200,000 | ||||
Cost of goods sold | 800,000 | ||||
Gross profit | 400,000 | ||||
Operating expenses | |||||
Selling | $280,000 | ||||
Administrative | 156,000 | ||||
436,000 | |||||
Net loss | $(36,000 | ) |
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.
1) Compute the break-even point in total sales dollars for 2020.
2) Blossom 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 $0.30 more per unit on better raw materials. The selling price per unit could be increased to only $5.25 because of competitive pressures. Blossom estimates that sales volume will increase by 25%. Compute the net income under Blossom's proposal and the break-even point in dollars
3) 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 Blossoms: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.23, 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 the net income under Pauls proposal and the break-even point in dollars.
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