In: Accounting
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 | (100,000,000) | ||
Gross profit | $88,000,000 | ||
Expenses: | |||
Selling expenses | $16,000,000 | ||
Administrative expenses | 12,000,000 | ||
Total expenses | (28,000,000) | ||
Operating income | $60,000,000 |
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 $11,280,000 in yearly sales. The expansion will increase fixed costs by $5,000,000 but will not affect the relationship between sales and variable costs.
Required:
1. Determine the total variable costs and the total fixed costs for the current year.
Total variable costs | $ |
Total fixed costs | $ |
2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
Unit variable cost | $ |
Unit contribution margin | $ |
3.
Compute the break-even sales (units) for the current year.
units
4.
Compute the break-even sales (units) under the proposed program for
the following year.
units
5.
Determine the amount of sales (units) that would be necessary under
the proposed program to realize the $60,000,000 of operating income
that was earned in the current year.
units
6.
Determine the maximum operating income possible with the expanded
plant.
$
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?
$
8. Based on the data given, would you recommend accepting the proposal?
Choose the correct
answer. A B C D or E