Break-Even Sales Under Present and Proposed Conditions The division of costs bet
ID: 2418552 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions
The division of costs between variable and fixed is as follows:
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.
Total variable costs
$
Total fixed 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.
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?
$
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./
INCEREASE IN SALES = $2800000
SELLING PRICE PER UNIT = $140
NUMBER OF UNIT INCEREASED ($2800000 / $140) = 20000 UNITS
INCEREASE IN FIXED COST = $1250000
FIXED COST PER UNIT ($1250000 / 20000) =$62.5
TOTAL FIXED COST FOR 2014 ($62.5 * 120000) = $7500000
TOTAL COST FOR 2014 ($6200000 +$4950000) = $11150000
TOTAL VARIABLE COST FOR 2014 ($11150000 -$7500000) = $3650000
-----------------------------------------------------------------------------------------------------------------------------------------------------
2./
UNIT VARIABLE COST ($3650000 / 120000 UNITS) = $30.42
UNIT CONTRIBUTION MARGIN ($140 - $30.42) = $109.58
------------------------------------------------------------------------------------------------------------------------------------------------------------
3./
BREAK EVEN SALES IN UNITS FOR 2014 = TOTAL FIXED COST / CONTRIBUTION MARGIN PER UNIT
= $7500000 / $109.58
= 68443 UNITS
BREAK EVEN SALES IN UNITS FOR PROPOSED PROGRAM = ($7500000 + $1250000) / $109.58
= 79850 UNITS
------------------------------------------------------------------------------------------------------------------------------------------------------------------
5./
UNITS OF SALES NEEDED = (TOTAL FIXED COST + TARGETED INCOME) / CONTRIBUTION MARGIN PER UNIT
= ($8750000 + $5650000) / $109.58
= 131411 UNITS
-------------------------------------------------------------------------------------------------------------------------------------------------------------
6./
SALES ($16800000 +$2800000) = $19600000
LESS VARIABLE COST ($30.42 * 120000) = ($4258800)
CONTRIBUTION MARGIN = $15341200
LESS FIXED COST ($7500000 +$1250000) = ($8750000)
NET INCOME = $6591200
--------------------------------------------------------------------------------------------------------------------------------------------------------------
7./
SALES = $16800000
LESS VARIABLE COST = ($3650000)
CONTRIBUTION MARGIN = $15950000
LESS FIXED COST ($7500000 +$1250000) = ($8750000)
NET INCOME = $7200000