Reference no: EM132649071
Question - Break-even; alternative cost structures
The income statement for Menage Industries for 2015 is as follows:
Menage Industries Income statement for year ending 31 December 2015
Sales revenue (200,000 units) $2,000,000
Cost of sales $1,200,000
Gross Profit 800,000
Operating costs:
Marketing and distribution $460,000
Adminstration 440,000 900,000
Profit (loss) $(100,000)
Cost behavior seems to follow this pattern: all of the cost of sales is considered variable; 50 per cent of the total marketing and distribution costs are variable; and 40 per cent of the total administration costs are variable.
Required -
A. Calculate the number of units that are needed to be sold in 2015 to break-even.
B. The finance manager has developed a number of alternative plans to get the entity back into profitability. One of the plans relates to switching to a more reliable supplier of raw materials which will increase the cost of sales per unit $.80. A change in the marketing strategy will decrease by $60,000. Competitive forces would allow an increase in selling price of only $.50 per unit. On the information available, would you advise a switch to this alternative plan?
C. Prepare an income statement for both alternatives given in (b).
D. Explain the concept of operating leverage as it relates to your answer in (b).