Management is considering a plant expansion program that will permit an increase

Question

Management is considering a plant expansion program that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $212,500, but will not affect the relationship between sales and variable costs.

Required:

1.  Determine the total fixed costs and the total variable costs for 2014.

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 $692,500 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?
$   SelectIncomeLossItem 10

Total variable costs $ Total fixed costs $ Howard Industries Inc., operating at full capacity, sold 64,000 units at a price of $45 per unit during 2014. Its income statement for 2014 is as follows: Management is considering a plant expansion program that will permit an increase of $900,000 in yearly sales. The expansion will increase but will not affect the relationship between sales and

Explanation / Answer

1. Determine the total fixed costs and the total variable costs for 2014. Total Variable Cost Total fixed Cost Cost of Good Sold $                1,050,000 $             350,000 Selling Expenses $                    240,000 $             160,000 Administrative Expenses $                    310,000 $               77,500 Total $                1,600,000 $             587,500 Total variable costs $1,600,000 Total fixed costs $587,500 2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin. Total Per Unit Sales $                2,880,000 $                  45.00 Variable cost $                1,600,000 $                  25.00 Contribution $                1,280,000 $                  20.00 Unit variable cost $25.00 Unit contribution margin $20.00 3. Compute the break-even sales (units) for 2014. Break-even sales (units) = Total Fixed Cost/Contribution per unit Break-even sales (units) =587500/20 Break-even sales (units) = 29375 Units 29,375 units 4. Compute the break-even sales (units) under the proposed program. Break-even sales (units) = Total Fixed Cost/Contribution per unit Break-even sales (units) =(587500+212500)/20 Break-even sales (units) = 40000 Units 40,000 units 5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $692,500 of income from operations that was earned in 2014. Required sales (units) = (Total Fixed Cost+Required Income)/Contribution per unit Required sales (units =(587500+212500+692500)/20 Required sales (units = 74,625 Units 74,625 units 6. Determine the maximum income from operations possible with the expanded plant. Total Sales $                3,780,000 Variable cost $                2,100,000 Contribution $                1,680,000 Total fixed Cost $                    800,000 Net Income $                    880,000 7. If the proposal is accepted and sales remain at the 2014 level, what will the income or loss from operations be for 2015? Total Sales $                2,880,000 Variable cost $                1,600,000 Contribution $                1,280,000 Total fixed Cost $                    800,000 Net Income $                    480,000

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