Break-Even Sales Under Present and Proposed Conditions Portmann Company, operating at full capacity, sold 1,000,000 units at a p

Question

20 days ago

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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 p

rice of $188 per unit during the current year. Its income statement is as follows:
Sales $188,000,000
Cost of goods sold (100,000,000)
Gross profit $88,000,000
Expenses:
Selling expenses $16,000,000
Administrative expenses 12,000,000
Total expenses (28,000,000)
Operating income $60,000,000
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 $11,280,000 in yearly sales. The expansion will increase fixed costs by $5,000,000 but will not affect the relationship between sales and variable costs.
Required:
1. Determine the total variable costs and the total fixed 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 $60,000,000 of operating income that was earned in the current year.
6. Determine the maximum operating income possible with the expanded plant.
7. If the proposal is accepted and sales remain at the current level, what will the operating income or loss be for the following year?
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 current 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 the current year sales.

Business

1 answer:

Scilla [3.2K] · Answer 1 · 2026-03-16T12:13:22+03:00

Answer:

1. Variable Fixed

Cost of goods sold 70,000,000 30,000,000

Selling Expenses 12,000,000 4,000,000

Administrative Exp. 6,000,000 6,000,000

Total 88,000,000 40,000,000

Note:

Cost of goods sold: 70% variable and 30% fixed on 10,000,000 respectively

Selling expenses: 75% variable and 25% fixed on $16,000,000 respectively

Administrative expenses: 50% variable and 50% fixed on $12,000,000 respectively

2. Unit Variable cost = Total variable cost / Units produced

Total Variable cost 88,000,000

Units produced 1,000,000

Unit variable cost 88

Unit Contribution margin = Selling Price - Variable cost per unit

Selling Price $188

- Variable cost per unit $88

Unit Contribution margin $100

3. Break even Point (Units) = Fixed cost / Contribution margin per unit

Fixed cost 40,000,000

Contribution margin per Unit 100

Break even Point (Units) 400,000

4. Break even point (units) = Fixed cost / Contribution margin per unit

Fixed cost 40,000,000

Increased Fixed cost 5,000,000

Total New fixed cost 45,000,000

Contribution margin per unit 100

Break even point (units) 450,000

5. Determined sales units = (New fixed cost + Desired Income) / Contribution margin

New Fixed Cost 45,000,000

Desired Income 60,000,000

105,000,000

Contribution margin 100

per unit

Determined sales units 1,050,000

6. Maximum Income from operation = Total New sales - Total New variable cost - Total Fixed cost

Sales 188,000,000

Increased sales 11,280,000

Total New sales 199,289,000

Variable cost 88,000,000

New Variable cost 5,280,000

Total New Variable cost 93,280,000

Total New Fixed cost 45,000,000

Maximum Income from 61,000,000

operation

Number of units = Increase in sales / Price per unit

New variable cost = Number of units * Unit variable cost

Increased sales 11,280,000

Price per unit 188

Number of units 60,000

Unit variable cost x 88.00

New Variable cost 5,280,000

7. Net income = Sales - Variable cost - New fixed cost

Sales 188,000,000

Less: Variable cost 88,000,000

Less: New fixed cost 45,000,000

Net Income 55,000,000

8. Option b. Supporting the proposal due to its potential to boost operational income.