OBJ. 2, 3 The division of costs between variable and fixed is as follows: Manage
ID: 2546661 • Letter: O
Question
OBJ. 2, 3
The division of costs between variable and 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.
Instructions
Determine the total variable costs and the total fixed costs for the current year.
Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
Answer
Check Figure: $50
Compute the break-even sales (units) for the current year.
Compute the break-even sales (units) under the proposed program for the following year.
Determine the amount of sales (units) that would be necessary under the proposed program to realize the $4,400,000 of income from operations that was earned in the current year.
Determine the maximum income from operations possible with the expanded plant.
If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year?
Explanation / Answer
1. Calculation of the total variable costs and the total fixed costs for the current year.
Cost Amount Ratio Variable cost ($) Fixed cost($)
Cost of Goods Sold 6,000,000 80:20 ( 6,000,000 x 80%) (6,000,000 x 20%)
4,800,000 1,200,000
Selling Expense 4,000,000 75:25 ( 4,000,000x75%) (4,000,000x25%)
3,000,000 1,000,000
Administrative Expense 3,000,000 70:30 (3,000,000x70%) (3,000,000x30%)
2,100,000 900,000
Total Variable & Fixed cost 9,900,000 3,100,000
2. a) Number of units manufactured in current year = 150,000
Variable cost per unit = Total Variable cost/ Number of unit manufactured= 9,900,000/150,000= $ 66
b) Unit contribution margin for current year = selling price per unit - variable cost per unit = 116-66= $ 50
3. Break even sales for current year in units = Total Fixed cost/contribution margin per unit
= 3,100,000/50 = 62,000 units
4. Break even sales for under proposed program for the following year
= Total Fixed cost of following year/contribution margin per unit
= (3,100,000+1,000,000)/50 = 4,100,000/50 = 82,000 units
(Since 1,000,000 additional ffixed cost increased due to proposed project)
5. The amount of sales (units) that would be necessary under the proposed program to realize the $4,400,000 of income from operations = (Total fixed cost + profit required)/ contribution margin per unit
= (4,100,000+4,400,000)/50= 8,500,000/50 = 1,70,000 units
6. The maximum income from operations possible with the expanded plant.
Maximum income is possible when the expanded capacity is fully utilized
Therefore total sales = sales of current year+ increased sales through expansion
= 150,000 + (3,625,000/116) = 150,000+ 31250 = 181,250
Contribution @ 181250 units sale = Total sale units x contribution margin per unit = 181250 x 50 = 9,062,500
- Total Fixed cost after proposed project = 4,100,000
Total income from operations = 4,962,500
7. If the proposal is accepted and sales remain at the current level
Contribution @ 150,000 units sale = 150,000 x 50 = 7,500,000
- Fixed cost after accepting the proposal = 4,100,000
Total Income from operations = 3,400,000.
8. Recommendation for accepting the proposal:
Additional Break even units required = 31,250 units.
If there is potential to increase the sales of 31,250 units of our product in the market. We can recommend to accept the proposal.
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