Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera
ID: 2489917 • 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 $ 3254400 Total variable costs $ 3561600 2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin. Unit variable cost $ 24 Unit contribution margin $ 48 3. Compute the break-even sales (units) for 2014. 67800 units 4. Compute the break-even sales (units) under the proposed program. 70800 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. 3724800 units 6. Determine the maximum income from operations possible with the expanded plant. $ 1080000 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? 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.
Explanation / Answer
Total Fixed Variable Sales 10684800 Cost of Good Sold 40:60 3792000 1516800 2275200 Selling Expenses 50:50 1896000 948000 948000 Administrative Expenses 70:30 1128000 789600 338400 Total 3254400 3561600 Ans 1 No.of units sold 148400 Units Variable cost Cost of good sold 2275200/148400 15.33 Selling Expenses 6.39 Administrative Expnese 2.28 Unit Variable Cost 24 Unit contribution Margin 72-24 48 Ans 3 Breakeven point 3254400/48 67800 Ans 4 New Breakeven point (3254400+144000)/48 70800 Ans 6 The maximum income from opeartions would be the additional incremental sales 1080000 Ans 7 Sales 10684800 Less: Variable Cost Cost of good sold 2275200 Selling Expenses 948000 Administrative Expnese 338400 Contribution 7123200 Less: Total Fixed cost (3254400+144000) 3398400 Net Income 3724800 Ans 8 In favor of the proposal because of the possibility of increasing income from operations. Because there will be increase in fixed cost by $144000 but sales could increase by $1080000 Additional Sales 1080000 No.of units (1080000/72) 15000 Less: Variable cost (15000*24) 360000 Incremental Contribution 720000 Less: Incremental Fixed Cost 144000 Incremental Revenue possibility 576000