Question

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         (98,000,000)
Gross profit         $90,000,000
Expenses:           
Selling expenses   $14,000,000        
Administrative expenses   17,800,000        
Total expenses         (31,800,000)
Operating income         $58,200,000
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 $13,160,000 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 $58,200,000 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?
$

8. Based on the data given, would you recommend accepting the proposal?

In favor of the proposal because of the reduction in break-even point.
In favor of the proposal because of the possibility of increasing income from operations.
In favor of the proposal because of the increase in break-even point.
Reject the proposal because if future sales remain at the current level, the income from operations will increase.
Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.
Choose the correct answer.

Answer 1