Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera
ID: 2466404 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions Battonkill Company, operating at full capacity, sold 131,600 units at a price of $63 per unit during the current year. Its income statement for the current year is as follows: Sales Cost of goods sold Gross profit Expenses: $8,290,800 2,940,000 $5,350,800 Selling expenses $1,470,000 Administrative expenses 882,000 Total expenses 2,352,000 Income from operations $2,998,800 The division of costs between fixed and variable is as follows: Fixed Variable 40% Cost of goods sold Selling expenses Administrative expenses 60% 50% 50% 30% Management is considering a plant expansion program that will permit an increase of $756,000 in yearly sales. The expansion will increase fixed costs by $100,800, but will not affect the relationship between sales and variable costsExplanation / Answer
1.
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TOTAL FIXED COST VARIABLE COST
Unit Contribution Margin ;
Present Sales (131,600 x $63) = $ 8,290,800
Less: Total Variable cost =$ 2,763,600
3. Break Even Sales for the current year = Fixed cost for the current year/Unit contribution cost
= $2,528,400/$42 = $60,200
4. Break Even sales (units) under proposed condiiton :
Sales under proposed condition ( $8,290,800 + $756,000) = $9,046,800
Less :Variable Cost = 2,763,600.
Contribution under proposed condition = $6,283,200
Contribution per unit = Total contribution /no. of units sold = $6,283,200/131,600 = $47.75
Total Fixed cost under proposed condition = Current fixed cost + increase in fixed cost
= $2,528,400 +$100,800 = 2,629,200
Break Even Sales under proposed condition = Total fixed cost under proposed condition /unit contribution
= $ 2,629,200/47.75 = 47,523 units
5. Sales (units) required to earn an income of $ 2,998,800 under proposed condition:
Sales required = Total fixed cost under proposed condition + Desired income/Unit contribution under proposed conditon = $2,629,200/$47.75 = 55,062 units
6. Income from operation under proposed programe:
Sales under proposed program = $ 8,290,800 + 756,000= $9,046,800
Total Cost ( Cost of goods sold + Selling Expenses + Administrative expenses + increase in fixed cost) = $2,940,000+$1,470,000 + $882,000 + $100,800 = 5,392,800
Proposed Operated income = $9,046,800 - $5,392,000 = $3,654,800
7. Sales of current Level = $ 8,290,800
Less; Total proposed Cost = $ 5,392,800
Proposed income from operations = $2,898,000
8. Answer b : Infavour of porposal because of the possibility of increasing the operting income by $656,000 i.e difference between proposed income from operations and current income form operations as given in the problem