04 Jun Question The condensed income statement for the Terri and Jerry partnership for 2008 is as follows:
Question
The condensed income statement for the Terri and Jerry partnership for 2008 is as follows:
Terri and Jerry Company
Income statement
For the year ended December 31, 2008
Sales (200,000 units) $1,200,000
Cost of goods sold 800,000
Gross Profit &n bsp; 400,000
Selling expenses $280,000
Administrative Expenses 160,000 440,000
Net loss &nbs p; (40,000)
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 the nearest unit, dollar, and percentage, where necessary. Use the cost volume profit income statement format in computing profits.)
(a) Compute the break even point in total sales, dollars, and in units for 2008.
(b) Terri has proposed a plan to get the partnership “out of the red” and improve its profitability. She feels the quality of the product could be substantially improved by spending $0.25 more per unit on better raw materials. The selling price per unit could be increased only $6.25 because of competitive pressures. Terri estimates that sales volumes will increase by 30%. What effect would Terri’s plan have on the profits and the break even point in dollars of the partner ship? (Round the contribution margin ratio to two decimal places.)
(c) Jerry 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 Terri’s. (1) Increase variable selling expenses to $0.79 per unit, (2) lower the selling price per unit by $0.30, and (3) increase fixed selling expenses by $35,000. Jerry quoted an old marketing research report that said that sales volumes would increase by 60% if these changes were made. What effect would Jerry’s plan have on the profits and the break-even point in dollars of the partnership?
(d) Which plan should be accepted? Explain your answer in a 1 page double-spaced paper explaining the problem and the solution. Pretend that the person reading it knows absolutely nothing about accounting or finance.
(e) Terry has another trading business that is expecting to sell 1,250 units of products at $12 per unit, and break-even sales for the product are $12,000.
(i) What is the margin of safety ratio?
(ii) What does this ratio mean to this business?
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