Break-Even Sales Under Present and Proposed Conditions

Battonkill Company, operating at full capacity, sold 165,500 units at a price of $63 per unit during 20Y5. Its income statement for 20Y5 is as follows:

Sales$10,426,500Cost of goods sold3,696,000Gross profit$6,730,500Expenses:Selling expenses$1,848,000Administrative expenses1,113,000Total expenses2,961,000Income from operations$3,769,500The division of costs between fixed and variable is as follows:

FixedVariableCost of good sold40%60%Selling expenses50%50%Administrative expenses70%30%Management is considering a plant expansion program that will permit an increase of $819,000 (13,000 units at $63 per unit) in yearly sales. The expansion will increase fixed costs by $109,200, but will not affect the relationship between sales and variable costs.

Instructions:

1. Determine for 20Y5 the total fixed costs and the total variable costs.

Total fixed costs$ _________________Total variable costs$ _________________2. Determine for 20Y5 (a) the unit variable cost and (b) the unit contribution margin.

a. Unit variable cost$ _________________ per unitb. Unit contribution margin$ _________________ per unit3. Compute the break-even sales (units) for 20Y5.

_________________ 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 $3,769,500 of income from operations that was earned in 20Y5.

_________________ units

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

$ _________________

7. If the proposal is accepted and sales remain at the 20Y5 level, what will the income or loss from operations be for 20Y6?

$ _________________ _________________

8. Assuming a lack of market research, disadvantages for expanding the plant include all of the following except:

The break-even point increases.

The sales necessary to maintain the current income from operations must increase in excess of 20Y5 sales.

If future sales remain at the 20Y5 level, the income from operations will decline.

The maximum income from operations possible with the expanded plant is less than the current income from operations.