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 139,000 units at a price of $75 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 $825,000 in yearly sales. The expansion will increase fixed costs by $110,000, but will not affect the relationship between sales and Costs that vary in total dollar amount as the level of activity changes.variable costs.

Required:

1. Determine for the current year the total Costs that tend to remain the same in amount, regardless of variations in the level of activity.fixed costs and the total variable costs.

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.
units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $3,775,000 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

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.

Choose the correct answer.

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 $10,425,000 Cost of goods sold 3,700,000 Gross profit $6,725,000 Expenses: Selling expenses $1,850,000 Administrative expenses 1,100,000 Total expenses 2,950,000 Income from operations $3,775,000

Explanation / Answer

we are proportionate % of fixed and variable, applying those we can calculate as

1) Total cost Variable % Variable Fixed % Fixed Amount Amount Cost of Goods sold 3700000 60% 2220000 40% 1480000 Selling Expense 1850000 50% 925000 50% 925000 Administrative expenses 1100000 30% 330000 70% 770000 Total 6650000 3475000 3175000 Total Variable costs 3475000 Total Fixed costs 3175000 2) Total Variable cost 3475000 Number of units 139000 Per unit Variable cost 25.00 Contribution Margin per unit Sale price 75 Less: Variable cost 25 Contribution Margin 50

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