Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera

Question

Break-Even Sales Under Present and Proposed Conditions

Battonkill Company, operating at full capacity, sold 110,800 units at a price of $51 per unit during 2014. Its income statement for 2014 is as follows:

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

Management is considering a plant expansion program that will permit an increase of $561,000 in yearly sales. The expansion will increase fixed costs by $74,800, but will not affect the relationship between sales and variable costs.

1. Determine for 2014 the total fixed costs and the total variable costs.

2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin.

$ 34

3. Compute the break-even sales (units) for 2014.

    50600 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 $2,046,800 of income from operations that was earned in 2014.
     __________ UNITS

6. Determine the maximum income from operations possible with the expanded plant.
     $ __________

7. If the proposal is accepted and sales remain at the 2014 level, what will the income or loss from operations be for 2015?
    $ 1972000

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 2014 level, the income from operations of will increase.

E. Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.

Sales $5,650,800 Cost of goods sold 2,006,000 Gross profit $3,644,800 Expenses: Selling expenses $1,003,000 Administrative expenses 595,000 Total expenses 1,598,000 Income from operations $2,046,800

Explanation / Answer

Particulars Amount($) Sales       56,50,800 Cost of goods sold       20,06,000 Gross profit       36,44,800 Expenses: Selling expenses       10,03,000 Administrative expenses        5,95,000 Total expenses       15,98,000 Income from operations       20,46,800 Particulars Fixed Variable Units Variable Cost per unit Cost of goods sold 40%        8,02,400 60% 12,03,600 110800           10.86 Selling expenses 50%        5,01,500 50%    5,01,500 110800              4.53 Administrative expenses 70%        4,16,500 30%    1,78,500 110800              1.61         17,20,400 18,83,600 110800                 17 Contribution = sales-Variable cost per unit = 51-17 = $34 Break Even for 2014 = Total Fixed cost/Contribution per unit = 1720400/34 = 50600 Units revised Break Even for proposal= revised Total Fixed cost/Contribution per unit = (1720400+74800)/34 = 52800 Units revised Sales Units= (revised Total Fixed cost+ desired profit)/Contribution per unit = (1720400+74800+2046800)/34 = 113000 Units Maximum income from possible from expanded plant = Existing profit- additional fixed cost + additional sales-additional variable cost =2046800-74800+561000-(561000/51*17)= $ 2346000 If the proposal is accepted and sales remain at the 2014 level, what will the income or loss from operations be for 2015 = (110800*34)-(1720400+74800) = 1972000 8 C.In favor of the proposal because of the increase in break-even point

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