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P22-3B Keppel Manufacturing

Price: $2.50

P22-3B Keppel Manufacturing had a bad year 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 60,000
units of product: Net sales $1,500,000; total costs and expenses $1,890,000; and net loss $390,000.
Costs and expenses consisted of the amounts shown on the next page.

    Total    Variable    Fixed  
Cost of goods sold   1,350,000  930,000  420,000
Selling expenses   420,000  65,000  355,000
Administrative expenses   120,000  55,000  65,000
   1,890,000  1,050,000  840,000

Management is considering the following independent alternatives for 2011.
1. Increase unit selling price 40% with no change in costs, expenses, and sales volume.
2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total
salaries of $30,000 plus a 4% 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.

(a) Compute the break-even point in dollars for 2010.
(b) Compute the break-even point in dollars under each of the alternative courses of action.
Which course of action do you recommend?

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