Question
Break-Even Sales Under Present and Proposed Conditions Kearney Company, operating at full capacity, sold 163,500 units at a price of $60 per unit during 20Y5.
Break-Even Sales Under Present and Proposed Conditions
Kearney Company, operating at full capacity, sold 163,500 units at a price of $60 per unit during 20Y5. Its income statement for 20Y5 is as follows:
Sales | $9,810,000 | ||
Cost of goods sold | (3,480,000) | ||
Gross profit | $6,330,000 | ||
Expenses: | |||
Selling expenses | $1,740,000 | ||
Administrative expenses | 1,040,000 | ||
Total expenses | (2,780,000) | ||
Income from operations | $3,550,000 |
The division of costs between fixed and variable is as follows:
Fixed | Variable | |||
Cost of good sold | 40% | 60% | ||
Selling expenses | 50% | 50% | ||
Administrative expenses | 70% | 30% |
Management is considering a plant expansion program that will permit an increase of $780,000 (13,000 units at $60 per unit) in yearly sales. The expansion will increase fixed costs by $104,000, but will not affect the relationship between sales and variable costs.
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $3,550,000 of income from operations that was earned in 20Y5. units
6. Determine the maximum operating income possible with the expanded plant. $
7. If the proposal is accepted and sales remain at the 20Y5 level, what will be the operating income or loss 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.
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