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 (99,000,000) Gross profit $87,000,000 Expenses: Selling expenses $15,000,000 Administrative expenses 10,900,000 Total expenses (25,900,000) Operating income $61,100,000 The division of costs between variable and fixed is as follows:
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 |
|
|
(99,000,000) |
|
Gross profit |
|
|
$87,000,000 |
|
Expenses: |
|
|
|
|
Selling expenses |
$15,000,000 |
|
|
|
Administrative expenses |
10,900,000 |
|
|
|
Total expenses |
|
|
(25,900,000) |
|
Operating income |
|
|
$61,100,000 |
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 $9,300,000 in yearly sales. The expansion will increase fixed costs by $3,500,000 but will not affect the relationship between sales and variable costs.
Required:
Determine the total variable costs and the total fixed costs for the current year.
|
Total variable costs |
$ |
|
Total fixed costs |
$ |
Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
|
Unit variable cost |
$ |
|
Unit contribution margin |
$ |
Compute the break-even sales (units) for the current year.
units
Compute the break-even sales (units) under the proposed program for the following year.
units
Determine the amount of sales (units) that would be necessary under the proposed program to realize the $61,100,000 of operating income that was earned in the current year.
units
Determine the maximum operating income possible with the expanded plant.
$
If the proposal is accepted and sales remain at the current level, what will the operating income or loss be for the following year?
$
A gross or per-unit basis might be used to express the contribution margin. It indicates the additional revenue made for each product or unit sold after the variable element of the business's costs have been subtracted. The selling price per unit less the variable cost per unit is the contribution margin. The metric, also known as dollar contribution per unit, shows how a specific product affects the company's overall earnings.
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