The condensed income statement for the Peri and Paul
PERI AND PAUL COMPANY Income Statement For the Year Ended December 31, 2017
Sales (240,000 units) | $1,200,000 | |
Cost of goods sold | 800,000 | |
Gross profit | 400,000 | |
Operating expenses | ||
Selling | $280,000 | |
Administrative | 150,000 | 430,000 |
Net loss | $ (30,000) |
A cost behavior analysis indicates that 75% of the cost of goods sold are variable. 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.
Instructions
(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 2017.
(b) Peri 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 $5.25 because of competitive pressures. Peri estimates that sales volume will increase by 25%. What effect would Peri'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) Paul 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 Peri's: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.25. and (3) increase fixed selling expenses by $40,000. Paul quoted an old
(d) Which plan should be accepted? Explain your answer.
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