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Break-even sales under present and proposed conditions Howard Industries Inc., operating at full capacity, sold 64,000 units at a price of $45 per unit during the current year. Its income 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 Income from operations............ $ 692,500 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 80% 20* Management is considering a plant expansion program for the following year that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $212,500 but will not affect the relationship between sales and variable costs. Instructions 1. Determine the total fixed costs and the total variable costs for the current year. 2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year. 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 $692,500 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? 8. Based on the data given, would you recommend accepting the proposal? Explain.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 21, Problem 21.2BPR
Textbook Problem

Break-even sales under present and proposed conditions

Howard Industries Inc., operating at full capacity, sold 64,000 units at a price of $45 per unit during the current year. Its income 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
Income from operations............   $ 692,500

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 80% 20*

Management is considering a plant expansion program for the following year that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $212,500 but will not affect the relationship between sales and variable costs.

Instructions

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

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

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 $692,500 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?

8. Based on the data given, would you recommend accepting the proposal? Explain.

Expert Solution

1.

To determine

Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit

To determine: the total fixed costs and the total variable costs for the current year.

Explanation of Solution

Determine the total variable cost.

Particulars Total cost (A) Variable cost percentage (B) Variable cost (A×B)
Cost of Goods sold $1,400,000 75% $1,050,000
Selling expenses $400,000 60% $240,000
Administrative expenses $387,500 80% $310,000
Total variable cost $1,600,000

Table (1)

Determine the total fixed cost...

Expert Solution

2.

(a)

To determine
the unit variable cost for the current year.

Expert Solution

(b)

To determine
the unit contribution margin for the current year.

Expert Solution

3.

To determine

To compute: the break-even sales (units) for the current year.

Expert Solution

4.

To determine

To compute: the break-even sales (units) under the proposed program for the following year.

Expert Solution

5.

To determine
the amount of sales (units) if the company desires a target profit of $692,500.

Expert Solution

6.

To determine
the maximum income from operations possible with the expanded plant.

Expert Solution

7.

To determine
the income or loss from operations for the following year if the proposal is accepted and the sales remains same.

Expert Solution

8.

To determine

To explain: whether to recommend for accepting the proposal.

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Chapter 21 Solutions

Accounting
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