Break-Even Sales Under Present and Proposed Conditions Howard Industries Inc., o

Question

Break-Even Sales Under Present and Proposed Conditions

Howard Industries Inc., operating at full capacity, sold 64,000 units at a price of $45 per unit during the current year. Its income statement is as follows:

The division of costs between variable and fixed is as follows:

Management is considering a plant expansion program for the following year that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $212,500 but will not affect the relationship between sales and variable costs.

Required:

1. Determine the total fixed costs and the total variable costs for the current year.

2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.

3. Compute the break-even sales (units) for the current year.
units

4. Compute the break-even sales (units) under the proposed program for the following year.
units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $692,500 of income from operations that was earned in the current year.
units

6. Determine the maximum income from operations possible with the expanded plant.
$

7. If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year?
$

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 current level, the income from operations will increase.

Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.

Choose the correct answer.

Sales $2,880,000 Cost of goods sold 1,400,000 Gross profit $1,480,000 Expenses: Selling expenses $400,000 Administrative expenses 387,500 Total expenses 787,500 Income from operations $ 692,500

Explanation / Answer

SOLUTION

(1)

Total fixed costs = $587,500

Total variable costs = $1,600,000

(2) Unit Variable Cost Ratio = $1,600,000 / $2,880,000 = 55%

Contribution margin ratio = 100-55 = 45%

Unit variable costs = $45 * 55% = $24.75

Unit contribution margin = $45 * 45% = $20.25

(3) Breakeven sales = Fixed Costs / Contribution margin

= $587,500 / 20,25 = 29,012

(4) Proposed fixed costs = $587,500 + $212,500 = $800,000

Breakeven sales = $800,000 / 20.25 = 39,506

Variable Costs ($) Fixed Costs ($) Cost of sales ($1,400,000 * 75%), ($1,400,000 * 25%) 1,050,000 350,000 Selling Expense ($400,000 * 60%), ($400,000 * 40%) 240,000 160,000 Administrative Expense ($387,500 * 80%), ($387,500 * 20%) 310,000 77,500 Total 1,600,000 587,500

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