Break-Even Sales Under Present and Proposed Conditions Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $186 per unit during the current year. Its income statement is as follows: Sales $186,000,000 Cost of goods sold (101,000,000) Gross profit $85,000,000 Expenses: Selling expenses $16,000,000 Administrative expenses 6,600,000 Total expenses (22,600,000) Operating income $62,400,000
Break-Even Sales Under Present and Proposed Conditions
Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $186 per unit during the current year. Its income statement is as follows:
| Sales | $186,000,000 | ||
| Cost of goods sold | (101,000,000) | ||
| Gross profit | $85,000,000 | ||
| Expenses: | |||
| Selling expenses | $16,000,000 | ||
| Administrative expenses | 6,600,000 | ||
| Total expenses | (22,600,000) | ||
| Operating income | $62,400,000 |
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 $13,020,000 in yearly sales. The expansion will increase fixed costs by $4,500,000 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.
4. Compute the break-even sales (units) under the proposed program for the following year.
fill in the blank 6 units
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $62,400,000 of operating income that was earned in the current year.
6. Determine the maximum operating income possible with the expanded plant.
$fill in the blank 8
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?
$fill in the blank 9
8. Based on the data given, would you recommend accepting the proposal? Multiple Choice! 1, 2, 3, 4, or 5 is the best answer!
- 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's sales.
Choose the correct answer.
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