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# \$20.00Accounting: Cost-Volume-Profit, Managerial Analysis Problem

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• Due on Aug. 16, 2009
• Asked on Aug 12, 2009 at 12:31:59PM

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Q:

BYP 6-2 The condensed income statement for the Phan and Nguyen partnership for 2005 is as follows.

PHAN AND NGUYEN COMPANY
Income Statement
For the Year Ended December 31, 2005

Sales (200,000 units) \$1,200,000
Cost of goods sold 800,000
Gross profit 400,000
Operating expenses
Selling \$320,000
Net loss (\$80,000)

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

Instructions

(Round to nearest unit, dollar, and percentage, where necessary.)
(a) Compute the break-even point in units and in total sales dollars for 2005.
(b) Phan has proposed a plan to get the partnership out of the red and improve its profitability. She feels that the quality of the product could be substantially improved by spending \$0.55 more per unit on better raw materials. The selling price per unit could be increased to only \$6.50 because of competitive pressures. Phan estimates that sales volume will increase by 30%. What effect would Phans plan have on the profits and the break-even point in dollars of the partnership?
(c) Nguyen 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 Phans. (1) Increase variable selling expenses to \$0.85 per unit, (2) lower the selling price per unit by \$0.20, and (3) increase fixed selling expenses by \$20,000. Nguyen quoted an old marketing research report that said that sales volume would increase by 50% if these changes were made. What effect would Nguyens plan have on the profits and the break-even point in dollars of the partnership?

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