Break-Even Sales Under Present and Proposed Conditions
Howard Industries Inc., operating at full capacity, sold 64,000units at a price of $45 per unit during the current year. Itsincome 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) |
| Operating income | | | $692,500 |
The division of costs between variable and fixed is asfollows:
| Variable | Fixed |
| Cost of goods sold | 75% | | 25% | |
| Selling expenses | 60% | | 40% | |
| Administrative expenses | 80% | | 20% | |
Management is considering a plant expansion program for thefollowing year that will permit an increase of $900,000 in yearlysales. The expansion will increase fixed costs by $212,500 but willnot affect the relationship between sales and variable costs.
Required:
1. Determine the total fixed costs and thetotal variable 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 thecurrent year.
units
4. Compute the break-even sales (units) underthe proposed program for the following year.
units
5. Determine the amount of sales (units) thatwould be necessary under the proposed program to realize the$692,500 of operating income that was earned in the currentyear.
units
6. Determine the maximum operating incomepossible with the expanded plant.
$
7. If the proposal is accepted and sales remainat the current level, what will the operating income or loss be forthe following year?
$
8. Based on the data given, would you recommendaccepting the proposal?
- In favor of the proposal because of the reduction in break-evenpoint.
- In favor of the proposal because of the possibility ofincreasing operating income.
- In favor of the proposal because of the increase in break-evenpoint.
- Reject the proposal because if future sales remain at thecurrent level, the operating income will increase.
- Reject the proposal because the sales necessary to maintain thecurrent operating income would be below the current yearsales.
