Question

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Break-Even Sales Under Present and Proposed Conditions Battonkill Company, operating at full capacity, sold 133,600 units at a price of $105 per unit during the current year. Its income statement for the current year is as follows: Sales $14,028,000 4,970,000 Cost of goods sold Gross profit $9,058,000 Expenses Selling expenses $2,485,000 Administrative expenses 1,505,000 Total expenses 3,990,000 Income from operations $5,068,000 The division of costs between fixed and variable is as follows: Fixed Variable Cost of goods sold 40% 60% Selling expenses 50% 50% Administrative 70% 30% expenses Management is considering a plant expansion program that will permit an increase of $1,260,000 in yearly sales The expansion will increase fixed costs by $168,000, but will not affect the relationship between sales and variable costs. Required: 1. Determine for the current year the total fixed costs and the total variable costs. Total fixed costs Total variable costs 2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year. Unit variable cost Unit contribution margin 3. Compute the break-even sales (units) for the current year. 10 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 $5,068,000 of income from operations that was earned in the current year. units 6. Determine the maximum income from operations possible with the expanded plant. 7. If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year? $ 8. Based on the data given, would you recommend accepting the proposal? a. In favor of the proposal because of the reduction in break-even point b. In favor of the proposal because of the possibility of increasing income from operations. c. In favor of the proposal because of the increase in break-even point. d. Reject the proposal because if future sales remain at the current level, the income from operations will increase. e. Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales. Choose the correct answer.

Answer 1

Required: 1 Variable Fixed Cost of goods sold |Selling Expenses Administrative Expenses 2982000 1988000 1242500 1242500 451500 1053500 Total 4676000 4284000 Required: 2 Unit variable cost = Total variable cost/ units produced Total variable cost 4676000 units produced Unit variable cost 133600 35.00 Units contribution margin Selling price - Variable cost per unit Selling price Variable cost per unit Unit contribution margin 105 35.00 70.00

Required: 3 Fixed cost/ Contribution margin per unit Break even point(units) Fixed cost 4284000 Contribution margin per unit Break even point (units) 70.00 61200 Required: 4 Fixed cost/ Contribution margin per unit Break even point(units) Fixed cost 4284000 Increased Fixed cost 168000 Total New Fixed cost 4452000 Contribution margin per Break even point (units) 7 C 63600 6 Required: 5 Determined sales units (New Fixed cost + Desire Income)/Contribution margin New Fixed cost Desired Income Contribution margin per unit Determined Sales units 4452000 5068000 70.00 136000

Required: 6 Maximum Income from operation Total New sales Total New variable cost- Total Fixed cost Sales 14028000 Increased sales Total New sales Variable cost New variable cost Total New variable cost Total New Fixed cost Maximum Income from operation 1260000 15288000 4676000 420000 5096000 4452000 5740000 Number of units = Increase in sales/ Price per unit New variable cost Number of units Unit variable cost Increased sales Price per unit Number of units Unit variable cost New Variable cost 1260000 105 12000 35.00 420000

Required: 7 Sales Variable cost New Fixed cost Net Income Sales 14028000 Less: Variable cost 4676000 Less: New Fixed cost 4452000 Net Income 4900000 Required: 8 |Option: (b) In favor of the proposal because of the possibility of increasing income from operations