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Breakeven point

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Gorham Manufacturing's sales slumped badly in 2008. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 600,000 units of product: Net sales $2,400,000; total costs and expenses $2,540,000; and net loss $140,000. Costs and expenses consisted of the amounts shown below.

Total Variable Fixed
Cost of goods sold $2,100,000 $1,440,000 $660,000
Selling expenses 240,000 72,000 168,000
Administrative expenses 200,000 48,000 152,000
$2,540,000 $1,560,000 $980,000

Management is considering the following independent alternatives for 2009.
1. Increase unit selling price 20% with no change in costs, expenses, and sales volume.

2. Change the compensation of salespersons from fixed annual salaries totaling $210,000 to total salaries of $60,000 plus a 5% commission on net sales.

Hint:
Compute break-even point under alternative courses of action.

Instructions
(a) Compute the break-even point in dollars for 2008.

(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round all ratios to nearest full percent.) Which course of action do you recommend?

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Solution Summary

The solution explains how to calculate the breakeven under alternative courses of action

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Break-even-points and leverage

15-12A. (Break-even point) You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost structure information for this company. All of it pertains to an output level of 10 million units. Using this information, find the break-even point in units of output for the firm.

Return on operating assets = 25%
Operating asset turnover = 5 times
Operating assets = $20 million
Degree of operating leverage = 4 times

15-13A. (Break-even point and operating leverage) Allison Radios manufactures a complete line of radio and communication equipment for law enforcement agencies. The average selling price of its finished product is $180 per unit. The variable cost for these same units is $126. Allison Radios incurs fixed costs of $540,000 per year.

a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve in order to reach the break-even point?
c. What would be the firm's profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units?
d. Find the degree of operating leverage for the production and sales levels given in part (c).

What would be the firm's profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units?
Find the degree of operating leverage for the production and sales levels given in part (c).

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