Break-Even Sales Under Present and Proposed Conditions Howard Industries Inc., o
ID: 2556944 • Letter: B
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.
Explanation / Answer
Answer
Total Amount
Fixed
Variable
Cost of goods sold
1400000
350000
1050000
Selling expenses
400000
160000
240000
Administrative expenses
387500
77500
310000
$2,187,500
$587,500
$1,600,000
Total variable costs
$1600000
Total fixed costs
$587500
Total variable costs
$1600000
Total Units Sold
64000
Unit Variable Cost
$25
Sale Price per unit
$45
(-) Unit Variable Cost
$25
Unit Contribution margin
$20
Fixed Cost [total]
$587500
Unit Contribution margin
$20
Break Even Sales [units]
29375
Current Fixed Cost
$587500
Additional Fixed cost under proposed program
$212500
Total Fixed cost in proposed program
$800000
Unit Contribution margin
$20
Break Even Sales [units]
40000
Target Income
$692500
Total Fixed cost under proposed program
$800000
Total contribution margin required to earn target income
$1492500
Unit Contribution margin
$20
Units required to be sold to earn Target Income
74625
Unit Contribution margin
$20
Unit sales Price
$45
Contribution margin ratio [20/45]
44.4444%
Increase in Sale in Proposed program
$900000
Increase in total contribution margin [ Sales x 44.4444444%]
$400000
(-) Increase in Fixed cost
$212500
Maximum Income from Operation possible will be
$187500
Current Net Income
$692500
Increase in Contribution margin
$0
(-) Increase in Fixed Cost
$212500
Income from operation for the following year
$480,000
Hence, income will decrease by $212,500 if sales remain at current same level.
Recommendation: In favor of the proposal because of the possibility of increasing income from operations.
If expected Sales increase in achieved, the net income will increase by $187,500. Hence, In favour.
Total Amount
Fixed
Variable
Cost of goods sold
1400000
350000
1050000
Selling expenses
400000
160000
240000
Administrative expenses
387500
77500
310000
$2,187,500
$587,500
$1,600,000