Break-Even Sales Under Present and Proposed Conditions Kearney Company, operating at full capacity, sold 118,500 units at a price of $81 per unit during 20Y5. Its income statement for 2015 is as follows: Sales $9,598,500 Cost of goods sold (3,402,000) Gross profit $6,196,500 Expenses: Selling expenses $1,701,000 Administrative expenses 1,026,000 Total expenses (2,727,000) Income from operations $3,469,500 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 $891,000 (11,000 units at $81 per unit) in yearly sales. The expansion will increase fixed costs by $118,800, but will not affect the relationship between sales and variable costs. Instructions: 1. Determine for 2015 the total fixed costs and the total variable costs. Total fixed costs Total variable costs 2. Determine for 2045 (a) the unit variable cost and (b) the unit contribution margin. a. Unit variable cost $0 per unit 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 $3,469,500 of income from operations that was earned in 2015. units 6. Determine the maximum operating income possible with the expanded plant. 7. If the proposal is accepted and sales remain at the 2015 level, what will be the operating income or loss for 2016? 8. Assuming a lack of market research, disadvantages for expanding the plant include all of the following except: a. The break-even point increases. b. The sales necessary to maintain the current income from operations must increase in excess of 2045 sales. C. If future sales remain at the 2015 level, the income from operations will decline. d. The maximum income from operations possible with the expanded plant is less than the current income from operations. Break-Even Sales Under Present and Proposed Conditions Kearney Company, operating at full capacity, sold 118,500 units at a price of $81 per unit during 20Y5. Its income statement for 2015 is as follows: Sales $9,598,500 Cost of goods sold (3,402,000) Gross profit $6,196,500 Expenses: Selling expenses $1,701,000 Administrative expenses 1,026,000 Total expenses (2,727,000) Income from operations $3,469,500 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 $891,000 (11,000 units at $81 per unit) in yearly sales. The expansion will increase fixed costs by $118,800, but will not affect the relationship between sales and variable costs. Instructions: 1. Determine for 2015 the total fixed costs and the total variable costs. Total fixed costs Total variable costs 2. Determine for 2045 (a) the unit variable cost and (b) the unit contribution margin. a. Unit variable cost $0 per unit 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 $3,469,500 of income from operations that was earned in 2015. units 6. Determine the maximum operating income possible with the expanded plant. 7. If the proposal is accepted and sales remain at the 2015 level, what will be the operating income or loss for 2016? 8. Assuming a lack of market research, disadvantages for expanding the plant include all of the following except: a. The break-even point increases. b. The sales necessary to maintain the current income from operations must increase in excess of 2045 sales. C. If future sales remain at the 2015 level, the income from operations will decline. d. The maximum income from operations possible with the expanded plant is less than the current income from operations
