Break-Even Sales Under Present and Proposed Conditions Management is considering
ID: 2379207 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions
Management is considering a plant expansion program that will permit an increase of $2,800,000 in yearly sales. The expansion will increase fixed costs by $1,250,000, 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 $5,650,000 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?
$
Explanation / Answer
Cost of goods sold (variable) = cost of goods sold * variable % = 6,200,000*60% = 3,720,000
Cost of goods sold (fixed) = cost of goods sold * fixed % = 6,200,000*40% = 2,480,000
Selling expenses (variable) = selling expenses * variable % = 3,400,000*75% = 2,550,000
Selling expenses (fixed) = selling expenses * fixed % = 3,400,000*25% = 850,000
Administrative expenses (variable) = administrative expenses * variable % = 1,550,000*60% = 930,000
Administrative expenses (fixed) = administrative expenses * fixed % = 1,550,000*40% = 620,000
Total variable costs = 3,720,000 + 2,550,000 + 930,000 = 7,200,000
Total fixed costs = 2,480,000 + 850,000 + 620,000 = 3,950,000
2. Unit variable cost = total variable costs/no of units = 7,200,000/120,000 = $60
Unit contribution margin = selling price per unit - unit variable cost = 140-60 = $80
3. Let breakeven sales units be X.
So X*unit contribution margin = fixed costs
X*80 = 3,950,000, which means X=49,375
4. Under proposed program, increase in fixed costs = 1,250,000
So new fixed costs = 3,950,000 + 1,250,000 = 5,200,000
Let breakeven sales units be X.
So X*unit contribution margin = fixed costs
X*80 = 5,200,000, which means X=65,000
5. Contribution margin = income from operations + fixed costs = 5,650,000+5,200,000 = 10,850,000
Let no of units sold be X
So X*80 = 10,850,000, which means X = 135,625
6. Increase in sales = 2,800,000
So increase in no of units = 2,800,000/selling price per unit = 2,800,000/140 = 20,000
So total no of units sold = 120,000 (which were sold in 2014) + 20,000 = 140,000
Contribution margin = 140,000*80 = 11,200,000
Maximum Income from operations = contribution margin-fixed costs = 11,200,000-5,200,000 = 6,000,000
7. Income from operations = old income from operations - increase in fixed costs = 5,650,000-1,250,000 = 4,400,000
Hope this helped ! Let me know in case of any queries.