Break-even sales under present and proposed conditions

Good Earth Garden Tools Inc., operating at full capacity, sold 292,000
units at a price of $45 per unit during 2003. Its income statement for
2003 is as follows:

Sales…………………………………………………………â
€¦â€¦$13,140,000

Cost of goods sold………………………………………………
8,000,000

Gross
profit………………………………………………………..
$5,140,000

Operating expenses:

Selling expenses……………………..$1,500,000

Administrative expenses……………...2,000,000

Total operating expenses………....
3,500,000

Income from operations $1,640,000

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

Fixed Variable

Cost of Sales 25% 75%

Selling expenses 40% 60%

Administrative expenses 80% 20%

Management is considering a plant expansion program that will permit an
increase of $2,250,000 in yearly sales. The expansion will increase
fixed costs by $600,000 but will not affect the relationship between
sales and variable costs.

Instruction:

Determine for 2003 the total fixed cost and the total variable cost.

Determine for 2003 (a) the unit variable cost and (b) the unit
contribution margin.

Compute the break-even sales (units) for 2003

Compute the break-even sales (units) under the proposed program

Determine the amount of sales (units) that would be necessary under the
proposed program to realize the $1,640,000 of income from operations
that was earned in 2003.

Determine the maximum income from operations possible with the expanded
plant.

If the proposal is accepted and sales remain at the 2003 level, what
will the income or loss from operations be for 2004?

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