Break$-$Even Sales Under Present and Proposed Conditions

Kearney Company, operating at full capacity, sold $137,300$ units at a price of $$132$ per unit during $20$Y$5.$ Its income statement for $20$Y$5$ is as follows:

Line Item Description Amount

Sales $$18,123,600$

Cost of goods sold $(6,424,000)$

Gross profit $$11,699,600$

Expenses:

Selling expenses $$3,212,000$

Administrative expenses $1,936,000$

Total expenses $(5,148,000)$

Operating income $$6,551,600$

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

Line Item Description 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 $$1,584,000(12,000$ units at $$132$ per unit$)$ in yearly sales. The expansion will increase fixed costs by $$211,200,$ but will not affect the relationship between sales and variable costs.

Instructions:

$1.$ Determine for $20$Y$5$ the total fixed costs and the total variable costs.

Total fixed costs$=$

Total variable costs$=$

$2.$ Determine for $20$Y$5($a$)$ the unit variable cost and $($b$)$ the unit contribution margin.

a$.$ Unit variable cost$=$

b$.$ Unit contribution margin$=$

$3.$ Compute the break$-$even sales $($units$)$ for $20$Y$5.$

$4.$ 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 $$6,551,600$ of operating income that was earned in $20$Y$5.$

$6.$ Determine the maximum operating income possible with the expanded plant.

$7.$ If the proposal is accepted and sales remain at the $20$Y$5$ level, what will be the operating income or loss for $20$Y$6?$