Reference no: EM133441029
Break-Even Sales Under Present and Proposed Conditions
Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $189 per unit during the current year. Its income statement is as follows:
| Sales |
|
|
$189,000,000 |
| Cost of goods sold |
|
|
(98,000,000) |
| Gross profit |
|
|
$91,000,000 |
| Expenses: |
|
|
|
| Selling expenses |
$14,000,000 |
|
|
| Administrative expenses |
19,800,000 |
|
|
| Total expenses |
|
|
(33,800,000) |
| Operating income |
|
|
$57,200,000 |
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 $11,340,000 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.
4. Compute the break-even sales (units) under the proposed program for the following year.
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $57,200,000 of operating income that was earned in the current year.
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?