Break$-$even sales under present and proposed conditions

Portmann Company, operating at full capacity, sold $1,000,000$ units at a price of $$188$ per unit during the current year. Its income statement is as follows:

Line Item Description Amount Amount

Sales $$188,000,000$

Cost of goods sold $(101,000,000)$

Gross profit $$87,000,000$

Expenses:

Selling expenses $$16,000,000$

Administrative expenses $10,600,000$

Total expenses $(26,600,000)$

Operating income $$60,400,000$

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

Line Item Description Variable Fixed

Cost of goods sold $70\%30\%$

Selling expenses $75\%25\%$

Administrative expenses $50\%50\%$

Management is considering a plant expansion program for the following year that will permit an increase of $$13,160,000$ in yearly sales. The expansion will increase fixed costs by $$5,000,000$ but will not affect the relationship between sales and variable costs.

Required:

$1.$ Determine the total variable costs and the total fixed costs for the current year.

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

$88,000,000$

Total fixed costs fill in the blank $2$ of $2$$

$39,600,000$

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

Unit variable cost fill in the blank $1$ of $2$$

$88$

Unit contribution margin fill in the blank $2$ of $2$$

$100$

$3.$ Compute the break$-$even sales $($units$)$ for the current year.

fill in the blank $1$ of $1$

$396,000$

units

$4.$ Compute the break$-$even sales $($units$)$ under the proposed program for the following year.

fill in the blank $1$ of $1$

units

$5.$ Determine the amount of sales $($units$)$ that would be necessary under the proposed program to realize the $$60,400,000$ of operating income that was earned in the current year.

fill in the blank $1$ of $1$

units

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

fill in the blank $1$ of $1$$

$7.$ 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 $1$ of $2$$

$56,900,000$

fill in the blank $2$ of $2$

Loss

$8.$ 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 current level, the income from operations will increase.

e$.$ Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.

Choose the correct answer.