Kearney Company, operating at full capacity, sold 400,000 units at a price of $246.60 per unit during

Question:

Kearney Company, operating at full capacity, sold 400,000 units at a price of $246.60 per unit during 20Y5. Its income statement for 20Y5 is as follows:

Sales ............................................................... $ 98,640,000

Cost of goods sold .............................................. (44,500,000)

Gross profit ...................................................... $ 54,140,000

Selling expenses ............................ $8,000,000

Administrative expenses .................... 3,000,000

Total expenses ................................................... (11,000,000)

Operating income ............................................... $ 43,140,000

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

.....................................Fixed ................................. Variable

Cost of goods sold .............. 28% ..................................... 72%

Selling expense ...................25% ..................................... 75%

Administrative expenses ........ 80% .................................... 20%

Management is considering a plant expansion program that will permit an increase of $8,631,000 (35,000 units at $246.60) in yearly sales. The expansion will increase fixed costs by $3,600,000 but will not affect the relationship between sales and variable costs?

Instructions

1. Determine for 20Y5 the total fixed costs and the total variable costs.

2. Determine for 20Y5 (a) the unit variable cost and (b) the unit contribution margin.

3. Compute the break-even sales (units) for 20Y5.

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 $43,140,000 of operating income that was earned in 20Y5.

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

7. If the proposal is accepted and sales remain at the 20Y5 level, what will be the operating income or loss for 20Y6?

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

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...