Problem:
French Broad Inc., operating at full capacity, sold 25,125 units at a price of $75 per unit during 2008. Its income statement for 2008 is as follows:
|
Sales
|
|
$1,884,375
|
|
Cost of goods sold
|
|
1,100,000
|
|
Gross profit
|
|
$ 784,375
|
|
Expenses:
|
|
|
|
Selling expenses
|
$125,000
|
|
|
Administrative expenses
|
125,000
|
|
|
Total expenses
|
|
250,000
|
|
Income from operations
|
|
$ 534,375
|
The division of costs between fixed and variable is as follows:
|
|
Fixed
|
Variable
|
|
Cost of sales
|
40%
|
60%
|
|
Selling expenses
|
50%
|
50%
|
|
Administrative expenses
|
75%
|
25%
|
Management is considering a plant expansion program that will permit an increase of $487,500 in yearly sales. The expansion will increase fixed costs by $135,000, but will not affect the relationship between sales and variable costs.
Instructions
1. Determine for 2008 the total fixed costs and the total variable costs.
2. Determine for 2008 (a) the unit variable cost and (b) the unit contribution margin.
3. Compute the break-even sales (units) for 2008.
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 $534,375 of income from operations that was earned in 2008.
6. Determine the maximum income from operations possible with the expanded plant.
7. If the proposal is accepted and sales remain at the 2008 level, what will the income or loss from operations be for 2009?
8. Based on the data given, would you recommend accepting the proposal? Explain.