PR $6-2$B Break$-$even sales under present and proposed conditions Obj. $2,3$

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 $...................(787,500)$

Operating income $....................$ $ $692,500$

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 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? Explain