CASE STUDY 2 McCree Corporation had a bad year in 2013, operating at a loss for the first time in its history. The company’s income statement showed the following results from selling 200,000 units of product: net sales $2,400,000; total costs and expenses $2,472,000; and net loss $72,000. Costs and expenses consisted of the following. Variable Fixed Cost of sales $1,070,000 $416,000 Selling expenses $356,000 $325,000 Admin expenses $110,000 $195,000 Total $1,536,000 $936,000 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 totalling $170,000 to total salaries of $50,000 plus a 6% 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 40:60. Required: 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. Which course of action do you recommend? C. “Break-even analysis is of limited use to management because a company cannot survive by just breaking even.” Do you agree? Explain.
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