Question

Ersatz manufactures a single product. The following income statement shows two different levels of activity, which are assumed to be within Ersatz’s relevant range. You may want to use a spreadsheet to perform calculations.


REQUIRED
A. What is Ersatz’s breakeven point in units?
B. Draw a CVP chart showing the two levels of activity and the breakeven point.
C. If Ersatz plans to sell 1,300 units, what will pretax income be?
D. Your boss asked you to draft an e-mail response to Ersatz’s major stockholder, who wants to know why pretax income increases by more than 800% when sales increase by just 50%.
Both your boss and the stockholder are busy people and expect short answers.
E. Management expects that variable costs and selling prices will rise by 3%, but fixed costs will not change. What will the new breakeven point be? Explain the result.
F. Management wants to change the way that sales representatives are paid. At present, sales representatives are paid $11,000 + $10 per unit. Management will replace this formula with a payment of $20 per unit. At what level of sales will income be the same under both options?
G. Add the new cost function to the preceding CVP chart.
H. Which of the two cost functions will minimize selling expenses assuming that sales are above the indifference level calculated in part (F)?
I. How would sales representatives be likely to respond to the new payment system?
J. Discuss the pros and cons to the company of changing the way sales representatives arepaid.


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  • CreatedJanuary 26, 2015
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