Question

Exercise #1 The company has a plant capasity of 220,000 units. Variable costs are $4,000,000 at this level. Fixed costs are $2,000,000 per year. The company sells each unit for $40. a, compute the break-even point in units and in dollars b. how many units would have to be sold to earn net income SI 50,000 per year? Use fotal cost equation Exercise N2 Carolina Furniture Company is operating at almost 100% of capacity. The company expects sales to increase by 25% in next year. To satisfy the demand for its product, the company is considering two alternatives: the first alternative would increase fixed costs by 15%, but not affect variable costs. The second alternative would not affect fixed costs but increase variable costs to 60% of the selling price of the company's product This is Carolina Furniture Company's condensed income statement for current year: $3,600,000 Sales Costs variable fixed $1.520,000 $600,000 Income before taxes S2,180.000 $1.420.000 1. Determine the break-even point in sales dollars for the next year under each of the alternatives, 2. Determine projected income for the next year under each of the alternatives 3. Which alternative would you recommend?

Answer 1

Solution 1. A Capacity B Variable Costs Variable costs per unit (B/A) Fixed Costs $ $ 2,20,000 units 40,00,000.00 18.18 per unit 20,00,000.00 per year Selling Price per unit Less: Variable Cost per unit Contribution per unit Tolosan 40.00 18.18 21.82 a. Break Even (Units) = Fixed Cost / Contribution per unit $2000000 / $21.82 91660 Units Break Even ($) Break even Units x Selling Price per unit 91660 units x $40 Solution 2. 3600000 Sales Cost Variable Fixed Profit before Tax 1520000 660000 1420000 Alternative 1 Increased Sales @ 25% $3600000 x125% 4500000 Costs Variable Cost Fixed Cost Increase by 15% Profit before Tax $1520000 x 125% $660000 x 115% 1900000 759000 1841000

$3600000 x125% 4500000 Alternative 2 Increased Sales @ 25% Costs Variable Cost @ 60% of SP Fixed Cost - No change Profit before Tax $4500000 x 60% $660000 2700000 660000 1140000 (A) 1 Table Showing Contribution ratio and Break-even Sales Particulars Current Year Alternative Alternative II Sales 3600000 4500000 4500000 Less: Variable Costs (15,20,000) (19,00,000) (27,00,000) Contribution (B) 2080000 2600000 1800000 Contribution to Sales % (B/A x 100) 57.78% 57.78% 40.00% Fixed Costs (D) 6,60,000 7,59,000 6,60,000 Break even in $ = D/C 11,42,308 13,13,654 16,50,000 (C) 2 Table Showing income of Current, Alternative 1 and Alternative 2 Particulars Current Year Alternative. Alternative II Sales 3600000 4500000 4500000 Less: Costs Variable Costs 1520000 1900000 2700000 Fixed Costs 660000 759000 660000 Income Before Taxes 1420000 1841000 1140000 3 Alternative 1 is recommended as it will have higher income as compared to Alternative 2 and Alternative is even having Lower when compared to the Current year's income. Thus, Alternative 1 should be chosen

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