Break Even Sales Under Present And Proposed Condition 490696

Break Even Sales Under Present And Proposed Conditionsboleyn Company

Break-Even Sales Under Present and Proposed Conditions Boleyn Company, operating at full capacity, sold 120,000 units at a price of $140 per unit during 2014. Its income statement for 2014 is as follows: The division of costs between variable and fixed is as follows: Management is considering a plant expansion program that will permit an increase of $2,800,000 in yearly sales. The expansion will increase fixed costs by $1,250,000, but will not affect the relationship between sales and variable costs.

Required:

1. Determine the total fixed costs and the total variable costs for 2014.

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

3. Compute the break-even sales (units) for 2014.

4. Compute the break-even sales (units) under the proposed program.

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $5,650,000 of income from operations that was earned in 2014.

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 the income or loss from operations be for 2015?

8. Based on the data given, would you recommend accepting the proposal? a. In favor of the proposal because of the reduction in break-even point. b. In favor of the proposal because of the possibility of increasing income from operations. c. In favor of the proposal because of the increase in break-even point. d. Reject the proposal because if future sales remain at the 2014 level, the income from operations will increase. e. Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.

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Paper For Above instruction

The Boleyn Company’s analysis of its break-even points under present and proposed conditions offers valuable insights into its cost structure and profitability strategies. An understanding of fixed and variable costs, contribution margins, and sales volume thresholds are fundamental for effective managerial decision-making, especially when considering expansion plans that can influence future profitability.

Initially, the calculation of total fixed and variable costs from 2014 data provides a foundation for analyzing how cost behaviors influence overall profitability. Given the selling price per unit of $140 and sales volume of 120,000 units, total sales revenue in 2014 amounted to $16,800,000. Without the specific income statement figures, a typical approach involves subtracting fixed costs from total contribution margin to determine variable costs and fixed costs segmentation.

The total variable costs can be derived by considering the variable cost per unit and Total variable costs = units sold × unit variable cost. The unit variable cost, in turn, is established by subtracting the contribution margin per unit from the selling price. Given the data indicates fixed costs will increase by $1,250,000 under the expansion plan, and sales are projected to rise by $2,800,000, corresponding to an increase in sales volume and thus, contribution margins.

Calculating the break-even point involves setting income from operations to zero, which allows calculation of the required sales volume where total contribution margin equals fixed costs. For the expansion scenario, fixed costs increase, and variable costs remain proportionate. This will result in a higher break-even volume, influencing strategic decisions.

To achieve a target income of $5,650,000—matching 2014's operating income—sales volume must be adjusted considering the new contribution margins after expansion. A higher sales volume is necessary to cover increased fixed costs while attaining desired profitability. Conversely, maximum income potential with the expanded plant depends on hypothetical sales estimates beyond the break-even point, demonstrating significant profit amplification if sales targets are surpassed.

If the expansion proposal is accepted but sales maintain 2014 levels, the resultant profit or loss can be computed by using the contribution margin ratio and fixed costs, including the additional fixed expense of the expansion. This scenario underscores the importance of sales projections in evaluating the profitability impact of expansion initiatives.

Based on these analyses, managerial recommendations can be made. Favorable perspectives include the potential for increased income and reduced break-even points, which facilitate greater operational flexibility and risk mitigation. Conversely, risks involve overestimating sales growth or misjudging cost behavior, which could lead to suboptimal financial outcomes. Therefore, a holistic view considering market conditions, cost management, and sales forecasts is essential for effective decision-making.

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