Question: Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 125,900 units at a price of $117 per unit during 2014. Its income statement for 2014 is as follows:
| Sales |
|
$14,730,300 |
| Cost of goods sold |
|
5,226,000 |
| Gross profit |
|
$9,504,300 |
| Expenses: |
|
|
| Selling expenses |
$2,613,000 |
|
| Administrative expenses |
1,560,000 |
|
| Total expenses |
|
4,173,000 |
| Income from operations |
|
$5,331,300 |
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 $1,287,000 in yearly sales. The expansion will increase fixed costs by $171,600, 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 $
Total variable costs $
2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin.
Unit variable cost $
Unit contribution margin $
3. Compute the break-even sales (units) for 2014.
4. Compute the break-even sales (units) under the proposed program.
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $5,331,300 of income from operations that was earned in 2014.
6. Determine the maximum income from operations possible with the expanded plant.
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?
a. In favor of the proposal because of the reduction in break-even point.
b. In favor of the proposal because of the possibility of increasing income from operations.
c. In favor of the proposal because of the increase in break-even point.
d. Reject the proposal because if future sales remain at the 2014 level, the income from operations of will increase.
e. Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.