Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera
ID: 2460630 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 127,900 units at a price of $60 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 $600,000 in yearly sales. The expansion will increase fixed costs by $80,000, 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 $2,774,000 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?
$ SelectIncomeLossItem 10
8. Based on the data given, would you recommend accepting the proposal?
In favor of the proposal because of the reduction in break-even point.
In favor of the proposal because of the possibility of increasing income from operations.
In favor of the proposal because of the increase in break-even point.
Reject the proposal because if future sales remain at the 2014 level, the income from operations of will increase.
Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.
Choose the correct answer.
Sales $7,674,000 Cost of goods sold 2,720,000 Gross profit $4,954,000 Expenses: Selling expenses $1,360,000 Administrative expenses 820,000 Total expenses 2,180,000 Income from operations $2,774,000Explanation / Answer
1) Fixed Variable Cost of goods sold 2720000 40% 60% 1088000 1632000 Selling expenes 1360000 50% 50% 680000 680000 Administrative expenses 820000 70% 30% 574000 246000 Total 2342000 2558000 Total fixed costs 2342000 Total variable costs 2558000 2) Total fixed costs 2342000 Total variable costs 2558000 Number of units 127900 Variable cost/unit = 2558000/127900 20 Selling price per unit 60 Contribution per unit = selling price - variable cost 40 3) Break even sales ( units) = Total fixed cost / contribution per unit = 2342000/40 = 58550 units 4) Revised Fixed cost ( proposed programmme) = 2342000 + 80000 = 2422000 Contribution per unit ( remains unchanged) 40 Break even sales ( units) = Total fixed cost / contribution per unit = 2422000/40 = 60550 units 5) Revised fixed cost 2422000 Desired profit 2774000 Total value 5196000 Contribution per unit ( remains unchanged) 40 Units required to achieve above value = Total value / contribution per unit = 5196000/40 = 129900 units 6) Sales (7674000 + 600000 ) 8274000 Less : Variable cost (127900 + 600000/60 ) * 20 2758000 Contribution 5516000 Less : Fixed cost 2422000 Net operating income 3094000 7) Sales 7674000 Less : Variable cost (127900 * 20) 2558000 Contribution 5116000 Less : Fixed cost 2422000 Net operating income 2694000 8) The correct statement is as below : In favor of the proposal because of the possibility of increasing income from operations.