Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $186 per unit during the current year. Its income statement is as follows: Sales     $186,000,000  Cost of goods sold     (99,000,000) Gross profit     $87,000,000  Expenses:       Selling expenses $15,000,000     Administrative expenses 10,900,000     Total expenses     (25,900,000) Operating income     $61,100,000 The division of costs between variable and fixed is as follows:

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Chapter11: Cost-volume-profit Analysis
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Problem 11.2.1P: Break-even sales under present and proposed conditions Kearney Company, operating at full capacity,...
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Break-Even Sales Under Present and Proposed Conditions

Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $186 per unit during the current year. Its income statement is as follows:

Sales

 

 

$186,000,000 

Cost of goods sold

 

 

(99,000,000)

Gross profit

 

 

$87,000,000 

Expenses:

 

 

 

Selling expenses

$15,000,000

 

 

Administrative expenses

10,900,000

 

 

Total expenses

 

 

(25,900,000)

Operating income

 

 

$61,100,000

The division of costs between variable and fixed is as follows:

 

Variable

Fixed

Cost of goods sold

70%

 

30%

 

Selling expenses

75%

 

25%

 

Administrative expenses

50%

 

50%

 

Management is considering a plant expansion program for the following year that will permit an increase of $9,300,000 in yearly sales. The expansion will increase fixed costs by $3,500,000 but will not affect the relationship between sales and variable costs.

Required:

Determine the total variable costs and the total fixed costs for the current year.

Total variable costs

$

Total fixed costs

$

 Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.

Unit variable cost

$

Unit contribution margin

$

Compute the break-even sales (units) for the current year.
 units

Compute the break-even sales (units) under the proposed program for the following year.
 units

Determine the amount of sales (units) that would be necessary under the proposed program to realize the $61,100,000 of operating income that was earned in the current year.
 units

Determine the maximum operating income possible with the expanded plant.
$

 If the proposal is accepted and sales remain at the current level, what will the operating income or loss be for the following year?
$

 

Expert Solution
Step 1:

A gross or per-unit basis might be used to express the contribution margin. It indicates the additional revenue made for each product or unit sold after the variable element of the business's costs have been subtracted. The selling price per unit less the variable cost per unit is the contribution margin. The metric, also known as dollar contribution per unit, shows how a specific product affects the company's overall earnings.

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