Break-Even Sales Under Present and Proposed Conditions

Battonkill Company, operating at full capacity, sold 148,400 units at a price of $72 per unit during 2014. Its income statement for 2014 is as follows:

Sales $10,684,800 Cost of goods sold 3,792,000 Gross profit $6,892,800 Expenses: Selling expenses $1,896,000 Administrative expenses 1,128,000 Total expenses 3,024,000 Income from operations $3,868,800

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 $1,080,000 in yearly sales. The expansion will increase fixed costs by $144,000, but will not affect the relationship between sales and variable costs.

Required:

1. Determine for 2014 the total fixed costs and the total variable costs.

Total fixed costs $ Total variable costs $

2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin.

Unit variable cost $ Unit contribution margin $

3. Compute the break-even sales (units) for 2014. 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 $3,868,800 of income from operations that was earned in 2014. units

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

7. If the proposal is accepted and sales remain at the 2014 level, what will the income or loss from operations be for 2015? $ Select Income Loss Item 10

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 2014 level, the income from operations of will increase. Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.

Choose the correct answer. Select a b c d e Item 11

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1. Multiply the percentages for fixed and variable costs by each cost.

2. a. Divide the total variable costs by number of units.

2. b. Sales price per unit minus variable costs per unit equals contribution margin per unit.

3. Fixed costs divided by unit contribution margin equals break-even point.

4. Fixed costs under the proposed program divided by contribution margin equals new break-even point.

5. (Fixed costs + Target profit) divided by unit contribution margin equals sales units.

6. Determine the increase in units by dividing the sales increase by the price per unit. Add the additional revenue and additional variable and fixed costs when calculating:

Sales minus fixed and variable costs equals income from operations.

7. Subtract the additional fixed costs from the operating income.

8. Consider the break-even point and the sales needed for the proposed level