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 118,500 units at a price of $99 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 $1,089,000 in yearly sales. The expansion will increase fixed costs by $145,200, 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.

2. Determine (a) the unit variable cost and (b) the 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 $4,240,500 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

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.

Sales $11,731,500 Cost of goods sold 4,158,000 Gross profit $7,573,500 Expenses: Selling expenses $2,079,000 Administrative expenses 1,254,000 Total expenses 3,333,000 Income from operations $4,240,500

Explanation / Answer

Answer 1.

Cost of Goods Sold = $4,158,000
Variable Cost of Goods Sold = 60%*$4,158,000 = $2,494,800
Fixed Cost of Goods Sold = 40%*$4,158,000 = $1,663,200

Selling Expenses = $2,079,000
Variable Selling Expenses = 50%*$2,079,000 = $1,039,500
Fixed Selling Expenses = 50%*$2,079,000 = $1,039,500

Administrative Expenses = $1,254,000
Variable Administrative Expenses = 30%*$1,254,000 = $376,200
Fixed Administrative Expenses = 70%*$1,254,000 = $877,800

Total Fixed Costs = Fixed Cost of Goods Sold + Fixed Selling Expenses + Fixed Administrative Expenses
Total Fixed Costs = $1,663,200 + $1,039,500 + $877,800
Total Fixed Costs = $3,580,500

Total Variable Costs = Variable Cost of Goods Sold + Variable Selling Expenses + Variable Administrative Expenses
Total Variable Costs = $2,494,800 + $1,039,500 + $376,200
Total Variable Costs = $3,910,500

Answer 2.

Number of units sold = 118,500
Selling Price = $99

Unit Variable Costs = Total Variable Costs / Number of units sold
Unit Variable Costs = $3,910,500 / 118,500
Unit Variable Costs = $33

Unit Contribution Margin = Selling Price - Unit Variable Costs
Unit Contribution Margin = $99 - $33
Unit Contribution Margin = $66

Answer 3.

Break-even Sales (units) = Fixed Costs / Unit Contribution Margin
Break-even Sales (units) = $3,580,500 / $66
Break-even Sales (units) = 54,250

Answer 4.

Increase in Sales = $1,089,000
Increase in Fixed Costs = $145,200

Total Fixed Costs = $3,580,500 + $145,200
Total Fixed Costs = $3,725,700

Break-even Sales (units) = Fixed Costs / Unit Contribution Margin
Break-even Sales (units) = $3,725,700 / $66
Break-even Sales (units) = 56,450

Answer 5.

Required Sales = (Fixed Costs + Desired Income from Operations) / Unit Contribution Margin
Required Sales = ($3,725,700 + $4,240,500) / $66
Required Sales = 120,700 units

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