Galati Manufacturing had a bad year in 2005. For the first time in its history it operated at a loss. The company's income statement showed the following results from selling 60,000 units of product: Net sales $1,500,000; total costs and expenses $1,740,000; and net loss $240,000. Costs and expenses consisted of the following.
Total Variable Fixed
Cost of goods sold $1,200,000 $780,000 $420,000
Selling expenses 420,000 65,000 355,000
Administrative expenses 120,000 55,000 65,000
$1,740,000 $900,000 $840,000
Management is considering the following independent alternatives for 2006.
1. Increase unit selling price 20% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $30,000 plus a 6%commission on net sales.
3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50.
Compute the break-even point in dollars for 2006
Compute the break-even point in dollars under each of the alternative courses of action. Which course of action do you recommend?