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Break-Even Sales Under Present and Proposed Conditions

Kearney Company, operating at full capacity, sold 107,100 units at a price of $102 per unit during 20Y5. Its income statement for 20Y5 is as follows:

Sales$10,924,200Cost of goods sold(3,876,000)Gross profit$7,048,200Expenses:Selling expenses$1,938,000Administrative expenses1,156,000Total expenses(3,094,000)Income from operations$3,954,200

The division of costs betweenfixedandvariableis as follows:

FixedVariableCost of good sold40%60%Selling expenses50%50%Administrative expenses70%30%

Management is considering a plant expansion program that will permit an increase of $1,020,000 (10,000 units at $102 per unit) in yearly sales. The expansion will increase fixed costs by $136,000, but will not affect the relationship between sales andvariable costs.

Instructions:

1.Determine for 20Y5 the totalfixed costsand the total variable costs.

Total fixed costs$Total variable costs$

2.Determine for 20Y5 (a) the unit variable cost and (b) theunit contribution margin.

a. Unit variable cost$per unitb. Unit contribution margin$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 $3,954,200 of income from operations that was earned in 20Y5.

units

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

$

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

$Income

8.Assuming a lack of market research, disadvantages for expanding the plant include all of the following except:

1. The break-even point increases.
2. The sales necessary to maintain the current income from operations must increase in excess of 20Y5 sales.
3. If future sales remain at the 20Y5 level, the income from operations will decline.
4. The maximum income from operations possible with the expanded plant is less than the current income from operations.