Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera
ID: 2502639 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 157,800 units at a price of $126 per unit during 2012. Its income statement for 2012 is as follows:
The division of costs between fixed costs and variable costs is as follows:
Management is considering a plant expansion program that will permit an increase of $1,638,000 in yearly sales. The expansion will increase fixed costs by $218,400, but will not affect the relationship between sales and variable costs.
Instructions:
1. Determine for 2012 the total fixed costs and the total variable costs.
2. Determine for 2012 (a) the unit variable cost and (b) the unit contribution margin.
3. Compute the break-even sales (units) for 2012.
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 $7,198,800 of income from operations that was earned in 2012.
units
6. Determine the maximum income from operations possible with the expanded plant.
$
7. If the proposal is accepted and sales remain at the 2012 level, what will the income or loss from operations be for 2013?
$ SelectIncomeLossItem 10
8. Based on the data given, would you recommend accepting the proposal? Explain.
Sales $19,882,800 Cost of goods sold 7,056,000 Gross profit $12,826,800 Expenses: Selling expenses $3,528,000 Administrative expenses 2,100,000 Total expenses 5,628,000 Income from operations $7,198,800Explanation / Answer
follow this
ontribution margin ratio = $16 / $40 = 40%
(b) Using the contribution margin per unit, compute the break-even point in units.
$1,400,000 / $16 = 87,500 units
(c) Using the contribution margin ratio, compute the break-even point in dollars.
$1,400,000 / 40% = $3,500,000
(d) Compute the margin of safety and margin of safety ratio.
Margin of safety in Units = 92,000 - 87,500 = 4,500
Margin of safety in Dollars = (92,000 X $40) - $3,500,000 = $180,000 (can also be calculated as 4,500 X $40)
Margin of safety ratio
$180,000 / (92,000 X $40) = 4.89% (can also be calculated as 4,500 / 92,000 = 4.89%)
(e) Compute the number of units that must be sold in order to generate net income of $240,000 using the contribution margin per unit.
($1,400,000 + $240,000) / $16 = 102,500 units
(f) Should Walton Widgets give a commission to its salesmen based on 8% of sales, if it will decrease fixed costs by $300,000 and increase sales volume 10%? Support your answer with labeled computations.
The current Sales level of 92,000 results in a pretax profit of
(92,000 X $16) - $1,400,000 = $72,000
The new variable cost will increase by $40 X 8% = $3.20, resulting in a total variable cost $3.20 + $24 = $27.30
The new Contribution Margin is $40.00 - $27.20 = $12.80
The new Sales Volume is 92,000 X 110% = 101,200
The new Fixed Costs = $1,400,000 - 300,000 = $1,100,000
The Profit Before Tax under these new circumstances are:
(101,200 X $12.80) - $1,100,000 = $195,360
The company earns $195,360 - $72,000 = $123,360 more in profit if they pay the commission