Break-Even Sales Under Present and Proposed Conditions

Battonkill Company, operating at full capacity, sold 178,600 units at a price of $90 per unit during the current year. Its income statement for the current year is as follows:

Sales			$16,074,000
Cost of goods sold			5,700,000
Gross profit			$10,374,000
Expenses:
Selling expenses	$2,850,000
Administrative expenses	1,710,000
Total expenses			4,560,000
Income from operations			$5,814,000

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 $1,260,000 in yearly sales. The expansion will increase fixed costs by $168,000, but will not affect the relationship between sales and variable costs.

Required:

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

Total fixed costs	$
Total variable costs	$

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

Unit variable cost	$
Unit contribution margin	$

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

4. Compute the break-even sales (units) under the proposed program. units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $5,814,000 of income from operations that was earned in the current year. units

6. Determine the maximum income from operations possible with the expanded plant. $

7. If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year? $

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

In favor of the proposal because of the reduction in break-even point.

In favor of the proposal because of the possibility of increasing income from operations.

In favor of the proposal because of the increase in break-even point.

Reject the proposal because if future sales remain at the current level, the income from operations will increase.

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.