Break-Even Sales Under Present and Proposed Conditions

Chillingsworth Industries Inc., operating at full capacity, sold 35,000 units at a price of $90 per unit during the current year. Its income statement is as follows:

Sales			$3,150,000
Cost of goods sold			1,280,000
Gross profit			$1,870,000
Expenses:
Selling expenses	$320,000
Administrative expenses	620,000
Total expenses			940,000
Income from operations			$930,000

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

	Variable		Fixed
Cost of goods sold	75%		25%
Selling expenses	60%		40%
Administrative expenses	40%		60%

Management is considering a plant expansion program for the following year that will permit an increase of $720,000 in yearly sales. The expansion will increase fixed costs by $270,000 but will not affect the relationship between sales and variable costs.

Required:

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

Total variable costs
Total fixed 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.

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

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $930,000 of income from operations that was earned in the current year.

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?