Question 4: Gorham Manufacturing’s sales slumped badly in 2010. 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 $2,390,000; total costs and expenses 2,540,000; and net loss $150,000. Costs and expenses consisted of the amounts shown below. TotalVariableCost of goods sold$2,100,000$1,440,000Selling expenses240,00072,000Administrative expenses200,00048,000 $2,540,000$1,560,000Management is considering the following independent alternatives for 2011.Increase unit selling price 25% with no change in costs, expenses, and sales volume.Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 3% commission on net sales.Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 60% variable and 40% fixed.Required:Compute the break-even point in dollars for 2010.Compute the break-even point in dollars under each of the alternative courses of action.Prepare income statement for each of the alternative courses of action

Break even sale is the point of sale where net profit is zero. It is the point of sale where total…

Answered: Gorham Manufacturing’s sales slumped…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Question 4:

Gorham Manufacturing’s sales slumped badly in 2010. 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 $2,390,000; total costs and expenses 2,540,000; and net loss $150,000. Costs and expenses consisted of the amounts shown below.

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

Management is considering the following independent alternatives for 2011.

Increase unit selling price 25% with no change in costs, expenses, and sales volume.
Change the compensation of salespersons from fixed annual salaries totaling $150,000 to total salaries of $60,000 plus a 3% commission on net sales.
Purchase new automated equipment that will change the proportion between variable and fixed cost of goods sold to 60% variable and 40% fixed.

Required:

Compute the break-even point in dollars for 2010.
Compute the break-even point in dollars under each of the alternative courses of action.
Prepare income statement for each of the alternative courses of action

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