Break-Even Sales Under Present and Proposed Conditions

Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $188 per unit during the current year. Its income statement is as follows:

sales $188,000,000

cost of goods sold (101,000,000)

gross profit. $87,000,000

expenses:

selling expenses. $14,000,000

administrative expenses. 13,600,000

total expenses. (27,000,000)

operating income. $59,400,000

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

variable:

cost of goods sold 70%

selling expenses. 75%

administrative expenses 50%

fixed:

cost of goods sold 30%

selling expenses 25%

administrative expenses 50%

Management is considering a plant expansion program for the following year that will permit an increase of $11,280,000 in yearly sales. The expansion will increase fixed costs by $3,500,000 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.

2 Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.

unit variable

unit contribution margin

3. compute the break-even sales (units) for the current year.

4. compute the break-even sales (units) under the proposed program for the following year.

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.

6. determine the maximum operating income possible with the expanded plant.

7 if the proposal is accepted and sales remain at current level, what will the operating income or loss be for the following year.