E 9. McLennon Company has a plant capacity of 100,000 units per year, but its budget for this year indicates that only 60,000 units will be produced and sold.

The entire budget for this year is as follows:

1. Given the budgeted selling price and cost data, how many units would McLennon have to sell to break even? (Hint: Be sure to consider selling and administrative expenses.)
2. Market research indicates that if McLennon were to drop its selling price to $3.80 per unit, it could sell 100,000 units. Would you recommend the drop in price? What would the new operating income or loss be?

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Sales (60,000 units at $4) Less cost of goods produced (based on $240,000 production of 60,000 units) Direct materials (variable) $60,000 Direct labor (variable) 30,000 Variable overhead costs 45,000 Fixed overhead costs 75,000 Total cost of goods produced Gross margin 210,000 $ 30,000 Less selling and administrative expenses Selling (fixed) $24,000 36,000 Administrative (fixed) Total selling and administrative expenses Operating income (loss) 60,000 ($ 30,000)