Break-Even Sales Under Present and Proposed Conditions

Kearney Company, operating at full capacity, sold 114,800 units at a price of $108 per unit during 20Y5.

Its income statement for 20Y5 is as follows:

Sales$12,398,400

Cost of goods sold(4,392,000)

Gross profit$8,006,400

Expenses:Selling expenses$2,196,000Administrative expenses1,332,000Total expenses(3,528,000)Income from operations$4,478,400

The division of costs betweenfixedandvariableis as follows:

FixedVariable

Cost of good sold Fixed: 40%Variable: 60%

Selling expenses Fixed: 50%Variable: 50%

Administrative expenses Fixed: 70% Variable: 30%

Management is considering a plant expansion program that will permit an increase of $972,000 (9,000 units at $108 per unit) in yearly sales. The expansion will increase fixed costs by $129,600, but will not affect the relationship between sales andvariable costs.

Instructions:

4.Compute the break-even sales (units) under the proposed program in units.

5.Determine the amount of sales (units) that would be necessary under the proposed program to realize the $4,478,400 of income from operations that was earned in 20Y5 in units.

6.Determine the maximum operating income possible with the expanded plant in dollars.

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