I need help with numbers 6 and 7 Break-Even Sales Under Present and Proposed Con

Question

I need help with numbers 6 and 7

Break-Even Sales Under Present and Proposed Conditions

Management is considering a plant expansion program that will permit an increase of $2,480,000 in yearly sales. The expansion will increase fixed costs by $272,000, 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 $1,100,000 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?
$

Explanation / Answer

6. Maximum possible income with expanded operations = $1,828,000 (see work below)

Sales revenue with expansion = $9,920,000 + $2,480,000 = $12,400,000

Fixed Costs with expansion = $2,900,000 + $272,000 = $3,172,000

Fixed costs before expansion = (5,000,000*.25) + (2,600,000*.40) + (1,220,000*.50) =

$2,900,000

Additional units sold: $2,480,000 / $124 = 20,000

Variable Costs before expansion = (5,000,000*.75) + (2,600,000*.60) + (1,220,000*.50) = $5,920,000

Variable Costs/Unit = $5,920,000 / 80,000 = $74/unit

Sales: $12,400,000 (calculated above)

COGS: $7,400,000 ($74/unit * 100,000 units)

Gross Margin: $5,000,000

Fixed Costs: 3,172,000 (calculated above)

Income from operations: $1,828,000

7. 2013 income with expansion and same sales as 2012: $1,748,000 (see work below)

Sales: $9,920,000

COGS: 5,000,000

Gross Margin: $4,920,000

Fixed Cost: $3,172,000

Income from Operations: $1,748,000

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