Question
In: Accounting
Break-Even Sales Under Present and Proposed Conditions Kearney Company, operating at full capacity, sold 163,500 units...
Break-Even Sales Under Present and Proposed Conditions
Kearney Company, operating at full capacity, sold 163,500 units at a price of $60 per unit during 20Y5. Its income statement for 20Y5 is as follows:
| Sales | $9,810,000 | ||
| Cost of goods sold | (3,480,000) | ||
| Gross profit | $6,330,000 | ||
| Expenses: | |||
| Selling expenses | $1,740,000 | ||
| Administrative expenses | 1,040,000 | ||
| Total expenses | (2,780,000) | ||
| Income from operations | $3,550,000 |
The division of costs between fixed and variable is as follows:
| Fixed | Variable | |||
| Cost of good sold | 40% | 60% | ||
| Selling expenses | 50% | 50% | ||
| Administrative expenses | 70% | 30% | ||
Management is considering a plant expansion program that will permit an increase of $780,000 (13,000 units at $60 per unit) in yearly sales. The expansion will increase fixed costs by $104,000, but will not affect the relationship between sales and variable costs.
Instructions:
1. Determine for 20Y5 the total fixed costs and the total variable costs.
| Total fixed costs | $ |
| Total variable costs | $ |
2. Determine for 20Y5 (a) the unit variable cost and (b) the unit contribution margin.
| a. Unit variable cost | $ per unit |
| b. 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
$3,550,000 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?
$
8. Assuming a lack of market research, disadvantages for expanding the plant include all of the following except:
- The break-even point increases.
- The sales necessary to maintain the current income from operations must increase in excess of 20Y5 sales.
- If future sales remain at the 20Y5 level, the income from operations will decline.
- The maximum income from operations possible with the expanded plant is less than the current income from operations.
Solutions
Expert Solution
1)
| variable | fixed | |
| cost of goods sold | 2088000 | 1392000 [3480000*.40] |
| selling expense | 870000 [1740000*.50] | 870000 |
| Administrative expense | 312000 [1040000*.30] | 728000 |
| Total | 3270000 | 2990000 |
2)
unit variable cost = Total variable cost /units sold
= 3270000/163500
= $ 20 per unit
unit contribution margin = price-unit variable cost
= 60 - 20
= $ 40 per unit
3)Break even point (units) =fixed cost /unit contribution margin
= 2990000/40
= 74750 units
4)Fixed cost (revised)=2990000+104000 = 3094000
Break even point (units) =fixed cost /unit contribution margin
= 3094000/40
= 77350 units
ekkarill92 answered 4 months agoRelated Solutions
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