Break-Even Sales Under Present and Proposed Conditions BeeGee Company, operating

Question

Break-Even Sales Under Present and Proposed Conditions

BeeGee Company, operating at full capacity, sold 150,000 units at a price of $116 per unit during the current year. Its income statement is as follows:

The division of costs between Costs that vary in total dollar amount as the level of activity changes.variable and Costs that tend to remain the same in amount, regardless of variations in the level of activity.fixed is as follows:

Management is considering a plant expansion program for the following year that will permit an increase of $3,625,000 in yearly sales. The expansion will increase fixed costs by $1,000,000 but will not affect the relationship between sales and variable costs.

Required:

1. Determine the total variable costs and the total fixed costs for the current year.

2. Determine (a) the unit variable cost and (b) the The dollars available from each unit of sales to cover fixed costs and provide operating profits.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 for the following year.
units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $4,400,000 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?
$ Income

Income

Loss

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

In favor of the proposal because of the reduction in break-even point.

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

In favor of the proposal because of the increase in break-even point.

Reject the proposal because if future sales remain at the current level, the income from operations will increase.

Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.

Sales $17,400,000 Cost of goods sold 6,000,000 Gross profit $11,400,000 Expenses: Selling expenses $4,000,000 Administrative expenses 3,000,000 Total expenses 7,000,000 Income from operations $4,400,000

Explanation / Answer

Variable Cost Fixed Cost Cost of Goods sold 6000000 80% 4800000 20% 1200000 Selling Expenses 4000000 75% 3000000 25% 1000000 Admin Expenses 3000000 70% 2100000 30% 900000 Total 9900000 3100000 Total Variable Cost $9,900,000 Total Fixed Cost $3,100,000 Unit Variable cost 9900000/150000 $ 66 per unit Unit Contribution Margin Per unit Sales 17400000 116 Vc 9900000 Contribution 7500000 Unit Contribution Margin 7500000/150000 $ 50 per unit 3 Break even Sales Fixed Cost/ Contribution per unit 3100000/50 62000 Break even Sales 62000 Units 4 Break Even Sales 62000*116 Break Even Sales $7,192,000

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