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P6-1A Fredonia Inc. had a bad year in 2013

Price: $2.50


P6-1A Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at
a loss. The company’s income statement showed the following results from selling 80,000
units of product: net sales $2,000,000; total costs and expenses $1,740,000; and net loss
$135,000. Costs and expenses consisted of the following.

  Total    Variable    Fixed  
Cost of goods sold   1,468,000  950,000  518,000
Selling expenses   517,000  92,000  425,000
Administrative expenses   150,000  58,000  92,000
 2,135,000  1,100,000  1,035,000
Management is considering the following independent alternatives for 2014.
1. Increase unit selling price 25% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $200,000
to total salaries of $40,000 plus a 5% 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.

Instructions
(a) Compute the break-even point in dollars for 2014.
(b) Compute the break-even point in dollars under each of the alternative courses of
action. (Round to the nearest dollar.) Which course of action do you recommend?

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