Break-Even Sales Under Present and Proposed Conditions Battonkill Company, opera
ID: 2569061 • Letter: B
Question
Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 112,800 units at a price of $93 per unit during the current year. Its income statement for the current year is as follows:
The division of costs between fixed and variable is as follows:
Management is considering a plant expansion program that will permit an increase of $837,000 in yearly sales. The expansion will increase fixed costs by $111,600, but will not affect the relationship between sales and variable costs.
Required:
1. Determine for the current year the total fixed costs and the total variable costs.
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.
units
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $3,794,400 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.
Sales $10,490,400 Cost of goods sold 3,720,000 Gross profit $6,770,400 Expenses: Selling expenses $1,860,000 Administrative expenses 1,116,000 Total expenses 2,976,000 Income from operations $3,794,400Explanation / Answer
Req 1 Total variable cost: Element of cost Total Cost Variable portion Variable cost Cost of Goods sold 3720000 60% 2232000 Selling Expenses 1860000 50% 930000 Admin Expense 1116000 30% 334800 Total Variable cost 3496800 Total Fixed cost Element of cost Total Cost Fixed Portion Fixed cost Cost of Goods sold 3720000 40% 1488000 Selling Expenses 1860000 50% 930000 Admin Expense 1116000 70% 781200 Total Fixed cost 3199200 Total Variable cost 3496800 Total Fixed cost 3199200 Req 2: Selling units 112,800 units Selling price per unit $ 93 per unit Total Variable cost $ 3496800 (for 112,800 units) Variable cost pe runit ( 3496800/112800) = $31 per unit Contribution margin per unit (Selling price- variable cost per unit) ( 93-31) = $ 62 per unit , Req 3: Total Fixed cost $ 3199200 Contribution margin per unit $ 62 pe runit Break even sales in units = Total Fixed cost / contribution margin per unit (3199200/62) = 51,600units Req 4: Under, proposed program fixed cost will increase by $ 111,600 Revised fixed cost (3199,200+111,600) $ 3310,800 Contribution margin per unit $ 62 per unit Revised Break even in units (Revised fixed cost / contribution margin per unit ) ( 3310,800 /62)= 53,400 units