5. PR.20.02B

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:

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)
Operating income			$692,500

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

	Variable		Fixed
Cost of goods sold	75%		25%
Selling expenses	60%		40%
Administrative expenses	80%		20%

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.

Total variable costs	$fill in the blank 1
Total fixed costs	$fill in the blank 2

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

Unit variable cost	$fill in the blank 3
Unit contribution margin	$fill in the blank 4

3. Compute the break-even sales (units) for the current year. fill in the blank 5 units

4. Compute the break-even sales (units) under the proposed program for the following year. fill in the blank 6 units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $692,500 of operating income that was earned in the current year. fill in the blank 7 units

6. Determine the maximum operating income possible with the expanded plant. $fill in the blank 8

7. If the proposal is accepted and sales remain at the current level, what will the operating income or loss be for the following year? $fill in the blank 9

IncomeLoss

8. Based on the data given, would you recommend accepting the proposal?

1. In favor of the proposal because of the reduction in break-even point.
2. In favor of the proposal because of the possibility of increasing operating income.
3. In favor of the proposal because of the increase in break-even point.
4. Reject the proposal because if future sales remain at the current level, the operating income will increase.
5. Reject the proposal because the sales necessary to maintain the current operating income would be below the current year sales.