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 129,600 units at a price of $120 per unit during 2012. Its income statement for 2012 is as follows:

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

Management is considering a plant expansion program that will permit an increase of $1,560,000 in yearly sales. The expansion will increase fixed costs by $208,000, but will not affect the relationship between sales and variable costs.

Instructions:

1. Determine for 2012 the total fixed costs and the total variable costs.

2. Determine for 2012 (a) the unit variable cost and (b) the unit contribution margin.

3. Compute the break-even sales (units) for 2012.
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 $5,632,000 of income from operations that was earned in 2012.
units

6. Determine the maximum income from operations possible with the expanded plant.
$

7. If the proposal is accepted and sales remain at the 2012 level, what will the income or loss from operations be for 2013?
$

Sales $15,552,000 Cost of goods sold 5,520,000 Gross profit $10,032,000 Expenses: Selling expenses $2,760,000 Administrative expenses 1,640,000 Total expenses 4,400,000 Income from operations $5,632,000

Explanation / Answer

total fixed costs = 0.4 * 5520000 + 0.5 * 2760000 + 0.7 * 1640000 = 4736000

total variable costs = 0.6 * 5520000 + 0.5 * 2760000 + 0.30 * 1640000 = 5184000

unit variable cost = 5184000/129600 = 40

unit contribution margin = 120 -40 = 80 per unit

break even sales

let x be break even sales

120 *x = 4736000 + 40 * x

80 * x = 4736000

x = 59200 units

break even sales units is 59200 units

UNDER PROPOSED PROGRAM

120 * x = 4736000 + 208000 + 40 * x

80 * x = 4944000

x = 61800 units

break even sales under proposed program is 61800 units

5) let y be no units required

120 * x -4736000-208000 - 40 * x = 5632000

80 *x = 10576000

x = 132200 units

hence no of units required to gain income of 5632000 is 132200 units

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