Reference no: EM132685763
Problem - Break-even sales under present and proposed conditions
Armstrong Company, operating at full capacity, sold 80,000 units at a price of $124 per unit during 2012. Its income statement for 2012 is as follows:
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Sales
|
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$9,920,000
|
|
Cost of goods sold
|
|
5,000,000
|
|
Gross profit
|
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$4,920,000
|
|
Expenses:
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|
|
|
Selling expenses
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$2,600,000
|
|
|
Administrative expenses
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1,220,000
|
|
|
Total expenses
|
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3,820,000
|
|
Income from operations
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$1,100,000
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The division of costs between fixed and variable is as follows:
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Fixed
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Variable
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Cost of goods sold
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25%
|
75%
|
|
Selling expenses
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40%
|
60%
|
|
Administrative expenses
|
50%
|
50%
|
Management is considering a plant expansion program that will permit an increase of $2,480,000 in yearly sales. The expansion will increase fixed costs by $272,000, but will not affect the relationship between sales and variable costs.
Instructions -
1. Determine for 2012 the total fixed costs and the total variable costs.
2. Determine for 2012 (a) the unit variable cost (b) the unit contribution margin.
3. Compute the break-even sales (units) for 2012.
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 $1,100,000 of income from operations that was earned in 2012.
6. Determine the maximum income from operations possible with the expanded plant.
7. If the proposal is accepted and sales remain at the 2012 level, what will the income or loss from operations be for 2013?
8. Based on the data given, would you recommend accepting the proposal? Explain.