Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera
ID: 2489863 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 148,400 units at a price of $72 per unit during 2014. Its income statement for 2014 is as follows:
Sales $10,684,800
Cost of goods sold 3,792,000
Gross profit $6,892,800
Expenses:
Selling expenses $1,896,000
Administrative expenses 1,128,000
Total expenses 3,024,000
Income from operations $3,868,800
The division of costs between fixed and variable is as follows:
Fixed Variable
Cost of goods sold 40% 60%
Selling expenses 50% 50%
Administrative expenses 70% 30%
Management is considering a plant expansion program that will permit an increase of $1,080,000 in yearly sales. The expansion will increase fixed costs by $144,000, 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.
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.
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 $3,868,800 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
Loss
Item 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.
Select
a
b
c
d
e
Item 11
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1. Multiply the percentages for fixed and variable costs by each cost.
2. a. Divide the total variable costs by number of units.
2. b. Sales price per unit minus variable costs per unit equals contribution margin per unit.
3. Fixed costs divided by unit contribution margin equals break-even point.
4. Fixed costs under the proposed program divided by contribution margin equals new break-even point.
5. (Fixed costs + Target profit) divided by unit contribution margin equals sales units.
6. Determine the increase in units by dividing the sales increase by the price per unit. Add the additional revenue and additional variable and fixed costs when calculating:
Sales minus fixed and variable costs equals income from operations.
7. Subtract the additional fixed costs from the operating income.
8. Consider the break-even point and the sales needed for the proposed level
Explanation / Answer
1 calculation of total fixed and variable costs fixed variable total a cost of goods sold 3792000 * 40 % 3792000 * 60 % 3792000 b cost of goods sold 1,516,800 2,275,200 3,792,000 c selling expenses 1896000 * 50 % 1896000 * 50 % 1896000 d selling expenses 948,000 948,000 1,896,000 e administrative expenses 1128000 * 70% 1128000 * 30 % 1128000 f administrative expenses 789,600 338,400 1,128,000 g total fixed cost ( b + d + f ) 3,254,400 3,561,600 6,816,000 2 calculation of unit variable cost and unit contribution margin unit variable cost a unit variable cost total variable cost / total number of units produced b unit variable cost 3561600 / 148400 c unit variable cost 24 unit contribution margin a sales 10,684,800 less : b variable costs 3,561,600 c contribution margin ( a - b ) 7,123,200 d unit contribution margin total contribution margin / number of units produced e unit contribution margin 7123200 / 148400 f unit contribution margin 48 3 calculation of break even sales units break even sales total fixed cost / contribution margin per unit break even sales 3254400 / 48 break even sales 67,800 4 calculation of break even sales at proposed program break even sales under proposed program total new fixed cost / contribution margin per unit total new fixeed cost 3254400 + 144000 total new fixeed cost 3,398,400 break even sales under proposed program 3398400 / 48 break even sales under proposed program 70,800