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 174,900 units at a price of $84 per unit during the current year. Its income statement for the current year 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 $1,344,000 in yearly sales. The expansion will increase fixed costs by $179,200, 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.

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

3. Compute the break-even sales (units) for the current year.
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 $5,311,600 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.

Sales $14,691,600 Cost of goods sold 5,208,000 Gross profit $9,483,600 Expenses: Selling expenses $2,604,000 Administrative expenses 1,568,000 Total expenses 4,172,000 Income from operations $5,311,600

Explanation / Answer

1.

2.

3. Break-even sales in units = Total fixed cost / Unit contribution margin = $ 4,482,800 / $ 56 = 80,050 units

4. Break-even sales under the proposed program = Total fixed cost / Unit contribution margin = $ 4,662,000 / $ 56 = 83,250 units

5. Sales required to realize operating income of $ 5,311,600 under the proposed program = Total fixed cost + Target profit / Unit contribution margin = $ ( 4,662,000 + 5,311,600) / $ 56 = 178,100 units

6. Maximum income from operations possible with the expanded plant = (190,900 x $ 56) - $ 4662,000 = $ 6,028,400

7. With current level of sales, income or (loss) for the following year = (174,900 x $ 56) - $ 4,662,000 = $ 5,132,400

8. b. In favor of the proposal because of the possibility of increasing income from operations.

Total fixed costs $ 4,482,800 Total variable costs $ 4,897,200

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