Reference no: EM131052157

Howard Industries Inc.

Break-even sales under present and proposed conditions

Howard Industries Inc., operating at full capacity, sold 64,000 units at a price of $45 per unit during the current year. Its income statement is as follows:

Sales	$2,880,000
Cost of goods sold	1,400,000
Gross profit	$1,480,000
Expenses:
Selling expenses	$400,000
Administrative expenses	387,500
Total expenses	787,500
Income from operations	$  692,500

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

	Variable	Fixed
Cost of goods sold	75%	25%
Selling expenses	60%	40%
Administrative expenses	80%	20%

Management is considering a plant expansion program for the following year that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $212,500 but will not affect the relationship between sales and variable costs.

Instructions

1. Determine the total fixed costs and the total variable costs for the current year.

2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.

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 $692,500 of income from operations that was earned in the current year.

6. Determine the maximum income from operations possible with the expanded plant.

7. If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year?

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