Text: Break-Even Sales Under Present and Proposed Conditions
Chillingsworth Industries Inc., operating at full capacity, sold
35,000 units at a price of $90 per unit during the current year.
Its income statement is as follows:
Sales
$3,150,000
Cost of goods sold
$1,280,000
Gross profit
$1,870,000
Expenses:
Selling expenses
$320,000
Administrative expenses
$620,000
Total expenses
$940,000
Income from operations
$930,000
The division of costs between variable and fixed is as
follows:
Variable
Fixed
Cost of goods sold
75%
25%
Selling expenses
60%
40%
Administrative expenses
40%
60%
Management is considering a plant expansion program for the
following year that will permit an increase of $720,000 in yearly
sales. The expansion will increase fixed costs by
$270,000 but will not affect the relationship between sales
and variable costs.
Required:
1. Determine the total fixed costs and the
total variable costs for 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 the current year.
4. Compute the break-even sales (units)
under the proposed program for the following year.
5. Determine the amount of sales (units)
that would be necessary under the proposed program to realize the
$930,000 of income from operations that was earned in the current
year.
6. Determine the maximum income from
operations possible with the expanded plant.
7. If the proposal is accepted and sales
remain at the current level, what will the income or loss from
operations be for the following year?