Question

In: Accounting

Company A is operating at full capacity, sold 45,600 units during the current year. Its income...

Company A is operating at full capacity, sold 45,600 units during the current year. Its income statement is as follows:

Sales		$5,654,400
Cost of goods sold		3,618,816
Gross profit		$2,035,584
Expenses:
Selling expenses	$984,000
Administrative expenses	430,000
Total expenses		1,414,000
Income from operations		$ 621,584

The division of costs between variable and fixed is as follows: (round to nearest dollar)

	Variable	Fixed
Cost of goods sold	70%	30%
Selling expenses	20%	80%
Administrative expenses	10%	90%

Management is planning to increase the unit sales price by $3 each, no change to the variable cost, but adding additional fixed cost of $25,000.

a. Determine the total variable costs and b. the total fixed costs for the current year.
a. Compute the break-even sales units and b. dollar sales for the current year. (round to nearest unit/dollar)
a. Compute the break-even sales units and b. dollar sales under the proposed program for the following year. (round to nearest unit/dollar)
How many units would have to be sold, under the proposed program, to generate income from operations of $965,500 (round to nearest unit).

Expert Solution

1.

The division of costs between variable and fixed is as follows:

	Variable		Fixed
Cost of goods sold	70%	3,618,816 x 70% = 2,533,171	30%	3,618,816 x 30% = 1,085,645
Selling expenses	20%	984,000 x 20% = 196,800	80%	984,000 x 80% = 787,200
Administrative expenses	10%	430,000 x 10% = 43,000	90%	430,000 x 90% = 387,000
Total		$2,772,971		$2,259,845

a) total variable costs = $2,772,971

b) total fixed costs = $2,259,845

2.

Selling price per unit = 5,654,400/45,600

= $124

Variable cost per unit = 2,772,971/45,600

= $61

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 124 - 61

= $63

a) break-even sales units = Fixed costs/Contribution margin per unit

= 2,259,845/63

= 35,971

b) Break even sales (in $) = Break-even sales units x Selling price per unit

= 35,971 x 124

= $4,460,404

3.

Management is planning to increase the unit sales price by $3 each, no change to the variable cost, but adding additional fixed cost of $25,000.

Selling price per unit = $124 + 3

= $127

Variable cost per unit = $61

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 127 - 61

= $66

Fixed costs = 2,259,845 + 25,000

= $2,284,845

a) break-even sales units = Fixed costs/Contribution margin per unit

= 2,284,845/66

= 34,619

b) Break even sales (in $) = Break-even sales units x Selling price per unit

= 34,619 x 127

= $4,396,613

4.

Units to be sold to get the target income = (Fixed costs + Target income)/Contribution margin per unit

= (2,284,845 + 965,500)/66

= 49,248

Note: Exact answers may slightly differ due to rounding off. Feel free to ask in case of any doubt. Thanks

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