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 $187 per unit during the current year. Its income statement is as follows:
Sales | $187,000,000 | ||
Cost of goods sold | (98,000,000) | ||
Gross profit | $89,000,000 | ||
Expenses: | |||
Selling expenses | $14,000,000 | ||
Administrative expenses | 15,800,000 | ||
Total expenses | (29,800,000) | ||
Operating income | $59,200,000 |
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 $13,090,000 in yearly sales. The expansion will increase fixed costs by $3,500,000 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
$59,200,000 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?
$