Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera
ID: 2416401 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions Battonkill Company, operating at full capacity, sold 99,700 units at a price of $78 per unit during 2014. Its income statement for 2014 is as follows: Management is considering a plant expansion program that will permit an increase of $702,000 in yearly sales. The expansion will increase fixed costs by $93,600, but will not affect the relationship between sales and variable costs. Required: 1. Determine for 2014 the total fixed costs and the total variable costs. Total fixed costs. Total variable costs 2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin. Unit variable cost Unit contribution margin 3. Compute the break-even sales (units) for 2014. 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 $2,810,600 of income from operations that was earned in 2014. units 6. Determine the maximum income from operations possible with the expanded plant. 7. If the proposal is accepted and sales remain at the 2014 level, what will the income or loss from operations be for 2015? 8. Based on the data given, would you recommend accepting the proposal? a. In favor of the proposal because of the reduction in break-even point. b. In favor of the proposal because of the possibility of increasing income from operations. c. In favor of the proposal because of the increase in break-even point. d. Reject the proposal because if future sales remain at the 2014 level, the income from operations of will increase. e. Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.Explanation / Answer
1.
Total fixed cost=40% of COGS +50 % of selling expenses+70% of administrative expenses
Total fixed cost=.40*2756000 + .50 *1378000 + .70 *832000
Total fixed cost=2373800
Total variable cost=60% of COGS +50 % of selling expenses+30% of administrative expenses
Total variable cost=.60*2756000 + .50 *1378000 + .30 *832000
Total variable cost=2592200
2. Unit variable cost and unit contribution margin
Number of units sold=99700
Selling price=78
Unit variable cost=2592200/99700=26
Contribution margin per unit=Selling price per unit-Variable cost per unit
Contribution margin per unit=78-26=52
3. Break even sales
Break even quantity =Fixed cost/Contribution margin per unit=2373800/52=45650 units
4. Break even sales under proposed program
New sales=8478600
New fixed cost=2467400
Selling price per unit=78
Variable cost per unit=26
Contribution margin =52
Break even quantity=2467400/52=47450 units
5. Required sales to earn profit =281600
Required Sales=Fixed cost +Variable cost +Profit
Sales=8478600
Number of units sold=8478600/78=108700
Variable cost=108700*52=5652400$
Fixed cost=2467400
Required Sales=2467400+5652400+281600=8401400$
Sales quantity=8401400/78=107710 units
6. Maximum income with expanded plant
New sales =8478600$
Sales quantity=108700
New fixed cost=2467400
Variable cost=108700*52=5652400
Profit=Sales-Total costs
Profit=8478600-2467400-5652400=358800$
Maximum profit=358800
7. If project accept and sales remain at same level , calculate income or loss for 2015..
New fixed cost=2467400
Sales=7776600
Total variable cost=2592200
Profit=Sales-Total cost
Profit=7776600-2467400-2592200=2717000
8. e