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Break-Even Sales Under Present and Proposed Conditions

Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $186 per unit during the current year. Its income statement is as follows:

Sales			$186,000,000
Cost of goods sold			(99,000,000)
Gross profit			$87,000,000
Expenses:
Selling expenses	$16,000,000
Administrative expenses	9,400,000
Total expenses			(25,400,000)
Operating income			$61,600,000

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 $9,300,000 in yearly sales. The expansion will increase fixed costs by $5,000,000 but will not affect the relationship between sales and variable costs.

Break-Even Sales Under Present and Proposed Conditions Portrnann Company, operating at full capacity, sold 1,000,000 units at a price of $1.06 per unit during the current year Its income statement is as follows: Sales $186,000,000 Cost of goods sold (99,000,000) Gross prot $87,000,000 Expenses: Selling expenses $16,000,000 Administrative expenses 9,400,000 Total expenses (25,400,000) Operating income $61,600,000 | The division of costs between -.-a ' at e and ii is as foilows: Variable Fixed Cost of goods sold 70% 30% Selling expenses 75% 25% Administrative 55% 50% expenses Management is considering a plant expansion program for the foliowing year that will permit an increase of $9,300,000 in yearly sales. The expansion will increase fixed costs by 55,000,000 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 ya ri able costs C 2. Determine [a] the unit variable cost and [b] the unit contribution margin for the current year. 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 $61,600,000 of operating income that was earned in the current year. 6. Determine the maximum operating income possible I.yith the expanded plant. 14: 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'?I 34:: 8. Based on the dalIncome acommend accepting the proposal? Loss . In favor of the Drum!!! reduction in breakeven 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 breakeven point. Reject the proposal because if future sales remain at the current levelr 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. Unit variable cost Unit contribution margin (Dal-IUD Choose the correct answer. v