Break-even sales under present and proposed conditionsPortmann Company, operating at full capacity, sold 1,000,000 units at a price of $188 per unit during the current year. Its income statement is as follows:Line Item DescriptionAmountAmountSales $188,000,000 Cost of goods sold (100,000,000)Gross profit $88,000,000 Expenses: Selling expenses$16,000,000 Administrative expenses12,000,000 Total expenses (28,000,000)Operating income $60,000,000The division of costs between variable and fixed is as follows:Line Item DescriptionVariableFixedCost of goods sold70%30%Selling expenses75%25%Administrative expenses50%50%Management is considering a plant expansion program for the following year that will permit an increase of $11,280,000 in yearly sales. The expansion will increase fixed costs by $5,000,000 but will not affect the relationship between sales and variable costs.5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $60,000,000 of operating income that was earned in the current year.6. Determine the maximum operating income possible with the expanded plant.

The operating capacity of a business is the total production that is possible within a given frame of time, that is, the total output units that a business can produce in a given set of time. It is an important measure for businesses because the management can ascertain the efficiency of the production process by estimating the operating capacity. The operating capacity depends on a variety of items including workers, materials, resources, machinery, and other elements used in the production process. But it is vital for a business to remain efficient throughout the production process and maintain a high operating capacity. 5. For estimating the sales (units), the new fixed costs, unit contribution margin, and target income should be known. Sales (units) = (New fixed costs + Target income)/Unit contribution margin Total fixed costs = $100,000,000×30% + $16,000,000×25% + $12,000,000×50% = $30,000,000 + $4,000,000 + $6,000,000 = $40,000,000New fixed costs = $40,000,000 + $5,000,000 = $45,000,000Total variable costs = $100,000,000×70% + $16,000,000×75% + $12,000,000×50% = $70,000,000 + $12,000,000 + $6,000,000 = $88,000,000Unit variable cost = $88,000,000/1,000,000 = $88Unit contribution margin = Unit selling price - Unit variable cost = $188 - $88 = $100 Sales (Units) = ($45,000,000 + $60,000,000)/$100 = 1,050,000 units Therefore, 1,050,000 units are required for the proposed plan. 6. The operating income is calculated as follows: Maximum sales = $188,000,000 + $11,280,000 = $199,280,000Contribution margin = $199,280,000*$100/$188 = 106,000,000Maximum income = $106,000,000*100 - $45,000,000 = $10,555,000,000 Therefore, the maximum income is $10,555,000,000.

Answered: Break-even sales under present and…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Break-even sales under present and proposed conditions

Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $188 per unit during the current year. Its income statement is as follows:

Line Item Description	Amount	Amount
Sales		$188,000,000
Cost of goods sold		(100,000,000)
Gross profit		$88,000,000
Expenses:
Selling expenses	$16,000,000
Administrative expenses	12,000,000
Total expenses		(28,000,000)
Operating income		$60,000,000

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

Line Item Description	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 $11,280,000 in yearly sales. The expansion will increase fixed costs by $5,000,000 but will not affect the relationship between sales and variable costs.

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $60,000,000 of operating income that was earned in the current year.

6. Determine the maximum operating income possible with the expanded plant.

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