The condensed income statement for the Terri and Jerry partnership for 2008 is as follows.
TERRI AND JERRY COMPANY
For the Year Ended December 31, 2008
Sales (200,000 units) $1,200,000
Cost of goods sold 800,000
Gross profit 400,000
Administrative 160,000 440,000
Net loss ($40,000)
A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 50% of the selling expenses are variable, and 25% of the administrative expenses are variable.
(Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.)
(a) Compute the break-even point in total sales dollars and in units for 2008.
(b) Terri 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 $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $6.25 because of competitive pressures. Terri estimates that sales volume will increase by 30%. What effect would Terri's plan have on the profits and the break-even point in dollars of the partnership? (Round the contribution margin ratio to two decimal places.)
(c) Jerry 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 Terri's. (1) Increase variable selling expenses to $0.79 per unit, (2) lower the selling price per unit by $0.30, and (3) increase fixed selling expenses by $35,000. Jerry quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. What effect would Jerry's plan have on the profits and the break-even point in dollars of the partnership?
(d) Which plan should be accepted? Explain your answer.
The solution explains some questions using CVP analysis