Question
Break-Even Sales Under Present and Proposed Conditions Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $189 per unit during the
Break-Even Sales Under Present and Proposed Conditions
Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $189 per unit during the current year. Its income statement is as follows:
Sales | $189,000,000 | ||
Cost of goods sold | (101,000,000) | ||
Gross profit | $88,000,000 | ||
Expenses: | |||
Selling expenses | $16,000,000 | ||
Administrative expenses | 12,600,000 | ||
Total expenses | (28,600,000) | ||
Operating income | $59,400,000 |
The division of costs between variable and fixed is as follows:
Variable | Fixed | |||
Cost of goods sold | 70% | 30% | ||
Selling expenses | 75% | 25% | ||
Administrative expenses | 50% | 50% |
Management is considering a plant expansion program for the following year that will permit an increase of $11,340,000 in yearly sales. The expansion will increase fixed costs by $3,000,000 but will not affect the relationship between sales and variable costs.
Required:
1. Determine the total variable costs and the total fixed 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. units
4. Compute the break-even sales (units) under the proposed program for the following year. units
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $59,400,000 of operating income that was earned in the current year. units
6. Determine the maximum operating income possible with the expanded plant. $
7. If the proposal is accepted and sales remain at the current level, what will the operating income or loss be for the following year? $ Income
8. Based on the data given, would you recommend accepting the proposal?
- In favor of the proposal because of the reduction in break-even point.
- In favor of the proposal because of the possibility of increasing income from operations.
- In favor of the proposal because of the increase in break-even point.
- Reject the proposal because if future sales remain at the current level, the income from operations will increase.
- Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.
Choose the correct answer. b
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