Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera
ID: 2455366 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 137,300 units at a price of $78 per unit during 2014. Its income statement for 2014 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 $858,000 in yearly sales. The expansion will increase fixed costs by $114,400, 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.
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 $3,871,400 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?
$--------? Select Income or Loss
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.
F. Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.
Choose the correct answer.
Explanation / Answer
1)
First we need to split the total costs in the income statement between variable and fixed costs
2)
3)
4)
5)
6)
7) If the proposal is accepted and the sales remain at 2014 level, then the loss from the operations will be the incurrence of the incremental fixed costs of $114,000 hence the profit will drop from $3,871,400 to $3,757,400
8) There is no Option E given
F. Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.
Determination of variable costs Total costs % Variable Variable costs Fixed Costs Cost of goods sold $3,796,000 60% $2,277,600 $1,518,400 Selling expenses $1,898,000 50% $949,000 $949,000 Administrative expenses $1,144,000 30% $343,200 $800,800 Expansion costs $114,400 $3,569,800 $3,382,600