Reference no: EM131803205
Problem - French Broad Inc, operating at full capacity, sold 25,125 units at a price of $75 per unit during 2008. Its income statement for 2008 is as follows
Sales...............................................................................................1,884,375
Cost of good sold.........................................................................1,100,000
Gross profit..................................................................................... 784,375
Expenses:
Selling expenses........................125,000
Administrative expenses.........125,000
Total Expenses....................................................250,000
Income from operations................................................534,375
The division of costs between fixed and variable is as follows:
Fixed Variable
Cost of sales 40% 60%
Selling expenses 50% 50%
Administrative Expenses 75% 25%
Management is considering a plant expansion program that will permit an increase of 487,500 in yearly sales. The expansion will increase fixed costs by 135,000, but will not affect the relationship between sales and variable costs.
Instructions -
a) Determine for 2008 the total fixed costs and the total variable costs.
b) Determine for 2008 a) the unit variable cost and b) the unit contribution margin
c) Compute the break-even sales (units) for 2008
d) Compute the break even sales (units) under the proposed program
e) Determine the amount of sales (units) that would be necessary under the proposed programs to realize the 534,375 of income from operations that was earned in 2008
f) Determine the maximum income from operations possible with the expanded plant
g) If the proposal is accepted and sales remain at the 2008 level, what will the income or loss from operations be for 2009.
h) Based on the data given would you recommend accepting the proposal? Explain.
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