The condensed income statement for the Peri and Paul partnership for 2022 is as follows.
A cost behavior analysis indicates that 75% of the cost of goods sold are variable and 40% of the selling expenses are variable. Administrative expenses are $92,500 fixed.
Instructions
(Round to nearest unit, cent, 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 2022.
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 $0.32 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%. Compute net income under Peri’s proposal and the break-even point in dollars.
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 $0.575 per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling expenses by $51,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. Compute net income under Paul’s proposal and the break-even point in dollars.
d. Which plan should be accepted? Explain your answer.
