Problem 21-2 (Algorithmic) Break-Even Sales Under Present and Proposed Condition
ID: 2369920 • Letter: P
Question
Problem 21-2 (Algorithmic)
Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 178,600 units at a price of $57 per unit during 2012. Its income statement for 2012 is as follows:
The division of costs between fixed costs and variable costs is as follows:
Management is considering a plant expansion program that will permit an increase of $798,000 in yearly sales. The expansion will increase fixed costs by $106,400, but will not affect the relationship between sales and variable costs.
Instructions:
1. Determine for 2012 the total fixed costs and the total variable costs.
2. Determine for 2012 (a) the unit variable cost and (b) the unit contribution margin.
3. Compute the break-even sales (units) for 2012.
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 $3,682,200 of income from operations that was earned in 2012.
units
6. Determine the maximum income from operations possible with the expanded plant.
$
7. If the proposal is accepted and sales remain at the 2012 level, what will the income or loss from operations be for 2013?
$ SelectIncomeLossItem 10
8. Based on the data given, would you recommend accepting the proposal? Explain.
Sales $10,180,200 Cost of goods sold 3,610,000 Gross profit $6,570,200 Expenses: Selling expenses $1,805,000 Administrative expenses 1,083,000 Total expenses 2,888,000 Income from operations $3,682,200Explanation / Answer
1) fixed costs = 40 % of 3610000 + 50 % of 1805000 + 70 % of 1083000
= 3,104,600
variable costs = 60 % of 3610000 + 50 % of 1805000 + 30 % of 1083000 = 3,393,400
2) unit variable cost = 3393400/ 178600 =19
unit contribution margin = 57 -19 = 38
= 38/57 = 66.67%
3) break-even sales = fixed cost / unit -contribution margin
= 3104600/38 =817000
4)break-even-sales = 3104600 +106400 / 38 =84500
5) amount of sales = (3104600 + 106400 + 3682200)/38 =181400 units
6) maximum income = 10180200 + 798000 -3104600 - 106400 - 3934000 =4373800
7)net income = 10180200 - 3104600 - 3393400 =3682200
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