Topic: The Break-even Point

You will discuss how cost behavior helps management plan operations and decide between alternative courses of action. You will also see how important variable costs and fixed costs are in determining the total costs under the high-low method, calculating the break-even point, and completing the cost-volume-profit analysis.

Scenario:

DessertsPlus Inc. was founded 2 years ago and has had declining sales for the past 2 years:

The most recent income statement for 2022 shows the following results selling 104,535 units which resulted in sales of $2,404,305:

DessertsPlus Income Statement: 2022	Total	Variable	Fixed
Cost of goods sold	$2,120,000	$1,591,655	$528,345
Selling expenses	245,920	90,990	154,930
Administrative expenses	197,160	67,034	130,126
	$2,563,080	$1,749,679	$813,401

The owners are considering the following independent alternatives going forward for the coming year.

1. Increasing the unit prices by either 15% and 20% without changing selling and administrative expenses.
2. Moving their business to a less expensive lease location saving the company $120,000 per year.
3. Change the compensation of sales personnel from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus 4% commission on sales. All other total costs total expenses and total sales remain unchanged.

Provide the following:

• Compute and explain the break-even point in sales dollars for 2022.
• Compute and explain the break-even point in sales dollars under each of the alternative courses of action.
• What course of action do you recommend and why?