Break Even Sales Under Present And Proposed Conditions

Break Even Sales Under Present And Proposed Conditionsbattonkill Compa

Break-Even Sales Under Present and Proposed Conditions Battonkill Company, operating at full capacity, sold 107,100 units at a price of $135 per unit during 2014. Its income statement for 2014 is as follows: Sales $14,458,500 Cost of goods sold 5,130,000 Gross profit $9,328,500 Expenses: Selling expenses $2,565,000 Administrative expenses 1,530,000 Total expenses 4,095,000 Income from operations $5,233,500 The division of costs between fixed and variable is as follows: Fixed Variable Cost of goods sold 40% 60% Selling expenses 50% 50% Administrative expenses 70% 30% Management is considering a plant expansion program that will permit an increase of $1,350,000 in yearly sales. The expansion will increase fixed costs by $180,000, but will not affect the relationship between sales and variable costs.

Required:

  1. Determine for 2014 the total fixed costs and the total variable costs. Total fixed costs $ ________________

    Total variable costs $ ________________

  2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin.

    (a) Unit variable cost $ ________________

    (b) Unit contribution margin $ ________________

  3. Compute the break-even sales (units) for 2014. units ________________
  4. Compute the break-even sales (units) under the proposed program. units ________________
  5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $5,233,500 of income from operations that was earned in 2014. units ________________
  6. Determine the maximum income from operations possible with the expanded plant. $ ________________
  7. If the proposal is accepted and sales remain at the 2014 level, what will be the income or loss from operations be for 2015? $ ________________

Based on the data given, would you recommend accepting the proposal? 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 2014 level, the income from operations of will increase. Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales. Choose the correct answer. Select a, b, c, d, or e.

Paper For Above instruction

The analysis of break-even sales under present and proposed conditions for Battonkill Company offers valuable insights into the company's financial flexibility and strategic planning. This evaluation involves calculating fixed and variable costs, determining contribution margins, and assessing the impact of potential expansion on overall profitability. The calculations reveal key thresholds that guide management decisions regarding operational stability and growth initiatives.

Firstly, to determine the total fixed and variable costs for 2014, it is essential to analyze the company's income statement and the cost structure. The total sales for 2014 amount to $14,458,500, and sales volume was 107,100 units at a unit price of $135. The cost of goods sold (COGS) was $5,130,000, and operating expenses totaled $4,095,000, composed of selling and administrative expenses. The allocation of costs between fixed and variable components provides a basis for calculating the total fixed costs and total variable costs.

For COGS, 40% is fixed, and 60% is variable. Therefore, the fixed COGS equals 40% of $5,130,000, which is $2,052,000, and the variable COGS is 60% of $5,130,000, equaling $3,078,000. Similarly, selling expenses comprise 50% fixed and 50% variable. The fixed selling expenses are 50% of $2,565,000, amounting to $1,282,500, and the variable component is $1,282,500. Administrative expenses are 70% fixed and 30% variable; fixed administrative expenses are 70% of $1,530,000, equaling $1,071,000, with the remaining $459,000 being variable.

Adding the fixed components yields total fixed costs: fixed COGS ($2,052,000) + fixed selling expenses ($1,282,500) + fixed administrative expenses ($1,071,000) = $4,405,500. Total variable costs are the sum of variable COGS ($3,078,000), variable selling expenses ($1,282,500), and variable administrative expenses ($459,000), totaling $4,819,500.

Next, the per-unit variable cost is calculated by dividing total variable costs by units sold: $4,819,500 / 107,100 ≈ $45 per unit. The unit contribution margin is then the selling price per unit ($135) minus the unit variable cost ($45), resulting in $90.

The break-even point in units is computed by dividing total fixed costs by the contribution margin per unit: $4,405,500 / $90 ≈ 48,950 units. This indicates that Battonkill Company needs to sell approximately 48,950 units to cover all fixed costs at current conditions.

Under the proposed expansion, fixed costs increase by $180,000, totaling new fixed costs at $4,405,500 + $180,000 = $4,585,500. The expansion allows an additional $1,350,000 in sales, which translates into increased units sold, assuming the same unit price. The new sales volume would be the sum of current units (107,100) and the additional units corresponding to the $1,350,000 increase in sales revenue, which is $1,350,000 / $135 ≈ 10,000 units. Thus, the projected total sales volume would be approximately 117,100 units.

Calculating the new break-even point, it becomes $4,585,500 / $90 ≈ 50,950 units. Comparing this with the projected sales volume shows that the company would surpass the break-even point, implying profitability.

To achieve the same operational income of $5,233,500, the required sales volume under the proposed plan can be calculated using the contribution margin approach. The total required contribution margin is the sum of fixed costs and desired income from operations: $4,585,500 + $5,233,500 = $9,819,000. Dividing this by the contribution margin per unit ($90) gives approximately 109,100 units necessary to maintain 2014's profit levels.

The maximum income from operations with the expanded plant is calculated by subtracting total fixed costs from total contribution margin at projected sales levels. At 117,100 units, total contribution margin is 117,100 units × $90 = $10,539,000. Deducting fixed costs ($4,585,500) results in a maximum possible operating income of approximately $5,953,500.

If the proposal is accepted, and sales remain at 2014's level, the income from operations in 2015 can be projected by considering the contribution margin for 107,100 units: 107,100 × $90 = $9,639,000. Subtracting fixed costs ($4,405,500) yields an income of approximately $5,233,500, indicating stable profitability provided sales do not decline.

Based on the analysis, accepting the proposed expansion appears advantageous. It reduces the break-even sales level and provides capacity for higher sales volume, maximizing profits, and leveraging fixed cost economies of scale. However, management should also consider risks such as market demand, operational efficiencies, and potential for sales decline.

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