Battonkill Company, operating at full capacity, sold 125,900 units at a price of

Question

Battonkill Company, operating at full capacity, sold 125,900 units at a price of $54 per unit during 2010. Its income statement for 2010 is as follows:


Sales $6,798,600
Cost of goods sold 2,412,000
Gross profit $4,386,600
Expenses:
Selling expenses $1,206,000
Administrative expenses 720,000
Total expenses 1,926,000
Income from operations $2,460,600

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


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

Management is considering a plant expansion program that will permit an increase of $594,000 in yearly sales. The expansion will increase fixed costs by $79,200, but will not affect the relationship between sales and variable costs.

1. Determine for 2010 the total fixed costs and the total variable costs.

Total fixed costs: $
Total variable costs: $

2. Determine for 2010 the (a) unit variable cost and (b) the unit contribution margin.


a. Unit variable cost: $
b. Unit contribution margin: $

3. Compute the break-even sales in units for 2010.
units

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

5. Determine the amount of sales in units that would be necessary under the proposed program to realize the $2,460,600 of income from operations that was earned in 2010.
units

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

7. If the proposal is accepted and sales remain at the 2010 level, what will the income or loss from operations be for 2011?
$

Explanation / Answer

Total Fixed Costs for 2010 1 Cost of Sales (40% of 2412000) 964,800.00 Selling Expenses ( 50% of 1206000) 603,000.00 Administrative Expenses ( 70% of 720000) 504,000.00 Total Fixed Expenses 2,071,800.00 Total Variable Costs for 2010 Cost of Sales (60% of 2412000) 1,447,200.00 Selling Expenses ( 50% of 1206000) 603,000.00 Administrative Expenses ( 30% of 720000) 216,000.00 Total Variable Expenses 2,266,200.00 2 Unit Variable Cost Total Variable Expenses 2,266,200.00 Units Produced 125,900.00 Unit Variable Cost 18.00 Unit Selling Price 54.00 Less: Unit Variable Cost 18.00 Unit Contribution 36.00 3 Break Even Sales in Units (Fixed Costs / Unit Contribution ) 2071800/36 57,550.00 4 Break Even Sales in Units for proposed program: New Fixed Costs 2,151,000.00 (79,200 +2,071,800) Unit Contribution 36.00 This would remain same since the relationship between sales and variable cost has not changed Break Even Sales in Units 59,750.00 (Fixed Costs / Unit Contribution ) 5 Amount of sales in units that would be necessary under the proposed program to achieve a Net Income of 2,460,600 Let the number of units be n 36n - 2,151,000 = 2,460,600 Solving the above equation we get, n= 128,100 Units 6 Maximum Income from operation possible with the expanded plant Sales 7,392,000.00 (6,798,000 + 594,000) Number of Units sold 136,888.89 (Assuming Selling Price remains unchanged ) Total Contribution 4,928,000.00 Less : Fixed Expenses (2,151,000.00) Net Income 2,777,000.00 7 Total Contribution 4,532,400.00 Fixed Expenses (2,151,000.00) Net Income 2,381,400.00

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