The condensed income statement for the Peri and Paul partnership for 2020 is as follows
Peri and Paul company income statement
For the year ended December 31, 2020
Items
$
Sales (240000 units)
1,200,000
Cost of good sold
800,000
Gross profit
400,000
Operating expenses
430,000
Selling
280,000
Administrative
150,000
Net loss
(30,000)
A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.
Instructions (Round to nearest unit, dollar, and percentage, where necessary)
a. Provide information on either the sales in dollars or sales quantity at the break-even point for 2020 (5 points)
b. Peri 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 $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $5.25 because of competitive pressures. Peri estimates that sales volume will increase by 25%. What effect would Peri’s plan have on the profits and the break-even point in dollars of the partnership? (Round the contribution margin ratio to two decimal places.)
