Question

Break-Even Sales Under Present and Proposed Conditions

Kearney Company, operating at full capacity, sold 141,000 units at a price of $93 per unit during 20Y5. Its income statement for 20Y5 is as follows:

Sales			$13,113,000
Cost of goods sold			(4,650,000)
Gross profit			$8,463,000
Expenses:
Selling expenses	$2,325,000
Administrative expenses	1,395,000
Total expenses			(3,720,000)
Income from operations			$4,743,000

The division of costs between fixed and variable is as follows:

	Fixed		Variable
Cost of good sold	40%		60%
Selling expenses	50%		50%
Administrative expenses	70%		30%

Management is considering a plant expansion program that will permit an increase of $1,209,000 (13,000 units at $93 per unit) in yearly sales. The expansion will increase fixed costs by $161,200, but will not affect the relationship between sales and variable costs.

Instructions:

1. Determine for 20Y5 the total fixed costs and the total variable costs.

Total fixed costs	$
Total variable costs	$

2. Determine for 20Y5 (a) the unit variable cost and (b) the unit contribution margin.

a. Unit variable cost	$ per unit
b. Unit contribution margin	$ per unit

3. Compute the break-even sales (units) for 20Y5.
units

4. Compute the break-even sales (units) under the proposed program.
units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $4,743,000 of income from operations that was earned in 20Y5.
units

6. Determine the maximum operating income possible with the expanded plant.
$

7. If the proposal is accepted and sales remain at the 20Y5 level, what will be the operating income or loss for 20Y6?
$  

8. Assuming a lack of market research, disadvantages for expanding the plant include all of the following except:

1. The break-even point increases.
2. The sales necessary to maintain the current income from operations must increase in excess of 20Y5 sales.
3. If future sales remain at the 20Y5 level, the income from operations will decline.
4. The maximum income from operations possible with the expanded plant is less than the current income from operations.

Answer 1

Required: 1 Cost of goods sold Selling Expenses Administrative Expenses Total Fixed / 1860000 1162500 976500 3999000 Variable 2790000 1162500 418500 4371000 Required: 2 Unit variable cost = Total variable cost/ units produced Total variable cost units produced Unit variable cost 4371000 141000 31.00 Units contribution margin = Selling price - Variable cost per unit Selling price Variable cost per unit Unit contribution margin 93.00 31.00 62.00 Required: 3 Break even point(units) = Fixed cost / Contribution margin per unit Fixed cost Contribution margin per unit Break even point (units) 3999000 62.00 64500

Required: 4 Break even point(units) = Fixed cost / Contribution margin per unit Fixed cost Increased Fixed cost Total New Fixed cost Contribution margin per unit Break even point (units) 3999000 161200 4160200 62.00 671001 Required: 5 Determined sales units = (New Fixed cost + Desire Income) / Contribution margin New Fixed cost Desired Income Contribution margin per unit Determined Sales units 4160200 4743000 62.00 143600 Required: 6 Maximum Income from operation = Total New sales - Total New variable cost - Total Fixed cost Sales 13113000 Increased sales 1209000 Total New sales 14322000 Variable cost 4371000 New variable cost 403000 Total New variable cost 4774000 Total New Fixed cost 41602001 Maximum Income from operation 5387800

Number of units = Increase in sales / Price per unit New variable cost = Number of units * Unit variable cost 1209000 93 Increased sales Price per unit Number of units Unit variable cost New Variable cost 13000 31.00 403000 Required: 7 Net Income = Sales - Variable cost-New Fixed cost Sales Less: Variable cost Less: New Fixed cost Net Income 13113000 4371000 41602001 4581800 Required: 8 Option (d) The maximum income from operations possible with the expanded plant is less than the current income from operations