Concept explainers
1.
Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:
To determine: the total fixed costs and the total variable costs for the current year.
1.
Explanation of Solution
Determine the total variable cost.
| Particulars | Total cost (A) | Variable cost percentage (B) | Variable cost (A×B) |
| Cost of Goods sold | $1,400,000 | 75% | $1,050,000 |
| Selling expenses | $400,000 | 60% | $240,000 |
| Administrative expenses | $387,500 | 80% | $310,000 |
| Total variable cost | $1,600,000 |
Table (1)
Determine the total fixed cost.
| Particulars | Total cost (A) | Variable cost (B) | Fixed cost (A-B) |
| Cost of Goods sold | $1,400,000 | $1,050,000 | $350,000 |
| Selling expenses | $400,000 | $240,000 | $160,000 |
| Administrative expenses | $387,500 | $310,000 | $77,500 |
| Total fixed cost | $587,500 |
Table (2)
Therefore, the total fixed costs is $587,500 and the total variable costs is $1,600,000 for the current year.
2.
(a)
the unit variable cost for the current year.
2.
(a)
Explanation of Solution
Determine the unit variable cost for the current year.
Total variable cost =$1,600,000 (refer Table 1)
Number of units =64,000 units
(b)
the unit contribution margin for the current year.
(b)
Explanation of Solution
Determine the unit contribution margin for the current year.
Selling price per unit =$45 per unit
Variable cost per unit =$25 per unit (refer 2 (a))
Therefore, the unit variable cost is $25 per unit and the unit contribution margin is $20 per unit for the current year.
3.
To compute: the break-even sales (units) for the current year.
3.
Explanation of Solution
Compute the break-even sales (unit) for the current year.
Fixed cost =$587,500 (refer Table 2)
Contribution margin per unit =$20 per unit (refer Part 2(b))
4.
To compute: the break-even sales (units) under the proposed program for the following year.
4.
Explanation of Solution
Compute the break-even point in sales (units) under the proposed program for the following year.
Fixed cost =$587,500 (refer Table 2)
Expected increase in fixed cost =$212,500
Contribution margin per unit =$20 per unit (refer Part 2(b))
Therefore, the break-even point in sales units under the proposed program for the following year is 40,000 units.
5.
the amount of sales (units) if the company desires a target profit of $692,500.
5.
Explanation of Solution
Determine the amount of sales (units) if the company desires a target profit of $692,500.
Fixed cost under the proposed program =$800,000 (refer Part 4)
Target Profit =$692,500
Contribution margin per unit =$20 per unit (refer Part 2 (b))
Therefore, the amount of sales (units) under the proposed program to realize the $692,500 of income from operations earned in the current year is 74,625 units.
6.
the maximum income from operations possible with the expanded plant.
6.
Explanation of Solution
Determine the maximum income from operations possible with the expanded plant.
| Determine the income from operations | ||
| Particulars | Amount ($) | Amount ($) |
| Sales | 2,880,000 | |
| Add: Increase in yearly sales | 900,000 | 3,780,000 |
| Less: Fixed costs | 800,000 | |
| Variable costs (2) | 2,100,000 | (2,900,000) |
| Income from operations | 880,000 | |
Table (3)
Working note:
Determine the number of units to be sold under plant expansion program.
Increase in yearly sales estimated =$900,000
Selling price per unit =$45 per unit
Number of units sold in the current year =64,000 units.
Determine the variable costs under the plant expansion program.
Number of units to be sold under the plant expansion program =84,000 units (1)
Variable cost per unit =$25 per unit (refer Part 2(a))
Therefore, the maximum income from operations possible with the expanded plant is $880,000.
7.
the income or loss from operations for the following year if the proposal is accepted and the sales remains same.
7.
Explanation of Solution
Determine the income or loss from operations for the following year if the proposal is accepted and the sales remains same.
Current year’s income from operations =$692,500
Estimated increase in fixed cost =$212,500
| Particulars | Amount ($) |
| Current income from operations | 692,500 |
| Less: Fixed costs | (212,500) |
| Income from operations | 480,000 |
Table (4)
Therefore, the income from operations for the following year if the proposal is accepted and the sales remains same is $480,000.
8.
To explain: whether to recommend for accepting the proposal.
8.
Explanation of Solution
Based on the above calculated data, if the proposal is accepted, it would increase the income from operations from $692,500 to $880,000. However, there are other factors those found to be unfavorable for the acceptance of the proposals. These are stated below:
- The break-even in sales (units) would increase from 29,475 units to 40,000 units.
- As a result, 74,625 units instead of 64,000 units would be required to be sold in order to maintain the current income from operations of $692,500.
- It is found that if the current sales of $2,880,000 remains same under the new proposal, it would decline the current income from operations of $692,500 to $480,000.
Therefore, it is suggested to the company that it would assess its sales potentials upon accepting the proposal at the first place. If the company has a good sales potential that could lead to a significant increase in sales, the proposal would be favorable. The estimated sales figures would help the company to evaluate the pros and cons of the accepting the new proposal
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Chapter 21 Solutions
Accounting
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Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub