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Breakeven point

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.

Compute break-even point under alternative courses of action.

(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?

Solution Summary

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