1. The following is an annual income statement from a small company.

Sales 1,000,000 units at $20 per unit $ 20,000,000

Less Cost of Goods Sold

Variable Labor $2,000,000

Variable Material $3,000,000

Variable Overhead $1,000,000

Fixed Overhead $2,000,000

Gross Margin

Less GS&A

Commission $2.00/unit

Fixed Travel $500,000

Fixed Advertising $1,000,000

Fixed Admin $600,000

Variable Admin $0.40/unit

Earnings Before Interest and Taxes

Interest Expense $2,500,000

Earnings After Interest Before Taxes

1. Determine the Break Even Quantity
2. Proposal: The company is operating at capacity. Capacity can be doubled with an $8,000,000 capital expenditure. The unit price must decline to $15/unit to sell all of the output. In this proposal, variable labor will decline to $0.50 per unit. Variable overhead will drop to $0.80 per unit. Fixed overhead will increase to $4,000,000. Fixed admin will increase to $2,000,000. The cost of capital is 8%. All other per unit parameters and fixed costs remain the same.

1. Reconstruct the income statement under the assumption of full capacity operation.
2. Calculate the new Break Even Quantity
3. What is the contribution?
4. What is the merit of this plan? Explain your opinion with facts.
5. What is wrong with this analysis?
6. At what point must the company temporarily shut down if this proposal is accpted?
7. What are the strategic imperatives for this company?
8. Differentiate this analysis from Functional/Marginal Analysis.
9. What is the relevance of this problem?