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.

$

3. Compute the break-even sales (units) for 2014.
      __________ 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?
    $ ___________ Income ____ or Loss ____

8. Based on the data given, would you recommend accepting the proposal? Choose the correct answer.

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

Caluclation of Total Fixed Cost & Total Variable Cost Particulars Cost Fixed Ratio Variable Ratio Fixed Cost Variable Cost Cost of goods sold          2,006,000 40% 60%          802,400           1,203,600 Selling Expenses          1,003,000 50% 50%          501,500              501,500 Administrative Expenses             595,000 70% 30%          416,500              178,500 Total       1,720,400           1,883,600 Caluclation of Unit Variable Cost & Unit Contribution margin Sales Price Per Unit                      51 Less: Variable Cost 17 1883600/110800 Contribution Per Unit                      34 Caluclation of Break Even Sales ( Units) Break even Units = Fixed Cost/ Contribution per unit 1720400/34 Breakeven Units               50,600 Caluclation of Proposed Sales Units for a Net Income of 2,046,800 Net Income          2,046,800 Add: Fixed Cost          1,795,200 Add: Variable Cost          1,883,600 Sales          5,725,600 Sales in Units @ 51 5725600/51 Sales in Units             112,267 6 )Income From Expandable plant : Sales          5,650,800 Add: Increase in Sales             561,000 Total Sales          6,211,800 Less: Cost Variable Cost        (1,883,600) Fixed Cost        (1,795,200) Net Income          2,533,000 7 )Income From Expandable plant at 2014 Level: Sales          5,650,800 Less: Variable Cost        (1,883,600) Fixed Cost        (1,795,200) Net Income          1,972,000 8) Option C)

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