Galati Manufacturing had a bad year in 2005. For the first time in its history it operated at a loss. The company's income statement showed the following results from selling 60,000 units of product: Net sales $1,500,000; total costs and expenses $1,740,000; and net loss $240,000. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,200,000 $780,000 $420,000 Selling expenses 420,000 65,000 355,000 Administrative expenses 120,000 55,000 65,000 $1,740,000 $900,000 $840,000 Management is considering the following independent alternatives for 2006. 1. Increase unit selling price 20% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $30,000 plus a 6%commission on net sales. 3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to50:50. QUESTION: 1) Compute the break-even point in dollars for 2006 2) Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend?

Galati Manufacturing had a bad year in 2005. For the first time in its history it operated at a loss. The company's income statement showed the following results from selling 60,000 units of product: Net sales $1,500,000; total costs and expenses $1,740,000; and net loss $240,000. Costs and expenses consisted of the following.

	Total		Variable            Fixed
	Cost of goods sold	$1,200,000	$780,000	$420,000
	Selling expenses	420,000	65,000	355,000
	Administrative expenses	120,000	55,000	65,000
		$1,740,000	$900,000	$840,000

Management is considering the following independent alternatives for 2006.

1.      Increase unit selling price 20% with no change in costs and expenses.

2.      Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $30,000 plus a 6%commission on net sales.

3.      Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to50:50.

QUESTION:

1)     Compute the break-even point in dollars for 2006

2)     Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend?

 

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