Reference no: EM132546788

PERI & PAUL COMPANY Income Statement For the year ended December 31, 2017

Sales (240,000 units) $1,200,000

Cost of goods sold (COGS) 800,000

Gross profit 400,000

Operating expenses:

Selling expenses $280,000

Administrative Expenses $150,000 $430,000

Net loss ($30,000)

An analysis of cost behavior indicates that the following are variable: 75% of the cost of goods sold, 50% of selling expenses, and 25% of administrative expenses.

Case Instructions: Round to the nearest unit, nearest percentage, or nearest dollar, or to the nearest percentage. Present the income statement in the cost-volume-gain format, CVG (CVP income statement), with the calculation of earnings.

Question A. Compute the break-even point (BEP) of sales in units and dollars for 2017.

Question B. Peri has proposed a plan to lift society out of losses and improve its profitability. She believes that product quality could be significantly improved by paying $0.25 more for each unit of better direct material. The sale price per unit could be increased to only $5.25 per unit, due to competitive pressure. Peri estimates that sales volume could increase by 25%. What would be the effect of the changes planned by Peri's plan on the dollar equilibrium point and the company's earnings? (Round the marginal contribution rate ('contribution margin ratio') to two decimal places.)

Question C. Paul's concentration in his high school was in marketing. He believes that sales volume can only be increased with an intensive advertising campaign, therefore he proposed the following plan as an alternative to Peri's: (1) increasing variable sales expenses to $0.59 per unit; (2) reduce the retail price per unit by $0.25; and (3) increase fixed sales expenses by $40,000. Paul cited an old marketing report that stated that sales would increase by 60%. If these changes were made, what would be the effect of the proposed changes to Paul's plan on the dollar equilibrium point and the company's earnings?