Howard Industries Inc.
Break-even sales under present and proposed conditions
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
|
|
Income from operations
|
$ 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 income from operations that was earned in the current year.
6. Determine the maximum income from operations possible with the expanded plant.
7. If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year?
8. Based on the data given, would you recommend accepting the proposal? Explain.