In: Accounting
Toler Company sells flags with team logos. Toler has fixed costs of $ 1,680,000 per year plus variable costs of $ 7.20 per flag. Each flag sells for $ 24.00.
Requirement 4. The company is considering an expansion that will increase fixed costs by 20 % and variable costs by $2.40 per flag. Compute the new breakeven point in units and in dollars. Should Toler undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.) (Use the equation approach.)
Begin by selecting the formula to compute the required sales in units to break even under the expansion plan.
Net sales revenue |
- |
Variable costs |
- |
|
= |
Target profit |
Rearrange the formula you determined above and compute the required number of flags to break even under the expansion plan.
Under the expansion plan, the breakeven point in units would be |
how many flags? |
Under the expansion plan, the breakeven point in dollars would be $ |
.______ |
Answer
Break even units without expansion plan | 100000 | Units |
Break even units with expansion plan | 140000 | Units |
Decision : NO expansion plan must not be followed
Reasoning
As with expansion plan there is going to be increase in break even level means more efforts to reach zero level profit or loss and expansion plan will reduce contribution per unit due to increase in variable expanses by $2.40
Calculated as
Calculation of break even units Without expansion plan
Net Sale | - | Variable Expenses | - | Fixed Expense | = | Target Profit |
Let break even units be Y at break even point target profit is Zero
so Equation will be written as
24Y | - | 7.20y | - | 1680000 | = | 0 |
further
16.80Y = $1680000
Break even units = Y = $168000/16.80 = 100000 Units
Calculation of break even units With expansion plan
New variable cost = $7.20+2.40 = $9.60
Fixed Cost = $1680000+20% = $2016000
New break even point will be = Fixed Cost/Selling price - Variable cost
= $2016000/(24-9.60)
= 140000 Units
Hit Thumbs up if satisfied
Have any query mention in comment section please
Thank you