The condensed income statement for the Peri and Paul partnership for 2014 is as follows.
PERI AND PAUL Company
For the year ended December 31, 2014
Sales (240,000 units) $1,200,000
Cost of goods sold 800,000
Gross Profit 400,000
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.
(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 2014.
(b) Peri has proposed a plan to get the partnership ?oout 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 marketing research report that said that sales volume would increase by 60% if these changes were made. What effect would Paul’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.