Break-Even Sales Under Present and Proposed Conditions

Kearney Company, operating at full capacity, sold 131,600 units at a price of $132 per unit during 20Y5. Its income statement for 20Y5 is as follows:

Line Item Description	Amount
Sales		$17,371,200
Cost of goods sold		(6,160,000)
Gross profit		$11,211,200
Expenses:
Selling expenses	$3,080,000
Administrative expenses	1,848,000
Total expenses		(4,928,000)
Operating income		$6,283,200

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

Line Item Description	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 $1,584,000 (12,000 units at $132 per unit) in yearly sales. The expansion will increase fixed costs by $211,200, 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 Unit b. Unit contribution margin $per unit

3. 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 $6,283,200 of operating income 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?