Problem 19-2B

Cost Behavior and Cost-Volume-Profit Analysis Warren / Reeve / Duchac Problem 19-2B solution

Break-even sales under present and proposed conditions
Gaelic Industries Inc., operating at full capacity, sold 22,350 units at a price of $150 per unit during 2010. Its income statement for 2010 is as follows:

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

Management is considering a plant expansion program that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $242,500, but will not affect the relationship between sales and variable costs.

1. Determine for 2010 the total fixed costs and the total variable costs.
Fixed costs: $1,582,500
Variable costs: $1,117,500

2. Determine for 2010 (a) the unit variable cost and (b) the unit contribution margin.
Unit variable cost: $50
Unit contribution margin: $100

3. Compute the break-even sales (units) for 2010.
15,825 units

4. Compute the break-even sales (units) under the proposed program.
18,250 units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $652,500 of income from operations that was earned in 2010.
24,775 units

6. Determine the maximum income from operations possible with the expanded plant.
$1,010,000

7. If the proposal is accepted and sales remain at the 2010 level, what will the income or loss from operations be for 2011?
$410,000 Income