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 127,900 units at a price of $99 per unit during the current year. Its income statement for the current year is as follows:

Sales $12,662,100
Cost of goods sold 4,488,000
Gross profit $8,174,100
Expenses:
Selling expenses $2,244,000
Administrative expenses 1,353,000
Total expenses 3,597,000
Income from operations $4,577,100

The division of costs between fixed and variable is as follows:

Fixed Variable
Cost of goods sold 40% 60%
Selling expenses 50% 50%
Administrative expenses 70% 30%

Management is considering a plant expansion program that will permit an increase of $990,000 in yearly sales. The expansion will increase fixed costs by $132,000, but will not affect the relationship between sales and variable costs.

Required:

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

Total fixed costs $
Total variable costs $

2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.

Unit variable cost $
Unit contribution margin $

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 $4,577,100 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?
$

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.

Explanation / Answer

1. Calcualtion of Total Fixed and variable cost -

Total variable cost = 4220700

Total fixed cost = 3864300

2.

3. Calcualtion of Break even sales -

BEP = Fixed cost / (Selling price per unit - variable cost per unit)

= 3864300 / (99 - 33)

= 3864300 / 66

= 58550 units.

4. Computation of BEP sales under the proposed program -

After expansion fixed cost will be increased by 132000 now fixed cost will become = 3864300 + 132000

= 3996300

BEP = 3996300/ (99 - 33)

= 3996300 / 66

= 60550 units

5. Desired income = (4577100 + 3996300)/(99-33)

= 8573400 / 66

= 129900 units

6. Determination of maximum income from operation possible with expanded plant

maximum income = 5105100 - 4577100 = 528000

7. the additional fixed cost part will be the loss in this case which is 132000.

8. In favor of proposal becaue of the possibility of increasing income from operations.

Please note all values are in $.

In case of any clarification required please comment.

particulars Fixed (%) Variable(%) Total Exp COGS 40 60 4488000 Selling 50 50 2244000 Adm. Exp 70 30 1353000 particulars Fixed cost variable Total Cost COGS 1795200 2692800 4488000 Selling 1122000 1122000 2244000 Adm. Exp 947100 405900 1353000 3864300 4220700

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