# Cost accounting: Break-even analysis

(See attached file for full problem description)

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Its income statement is as follows:

Sales $2,628,000

Cost of Goods Sold 1,600,000

Gross Profit $1,028,000

Operating expenses:

Selling expenses $300,000

Administrative expenses 400,000

Total operating expenses 700,000

Income from operations $328,000

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 expansin program that will permit an increase

of $432,000 in yearly sales. The expansion will increase fixed costs by $140,000

but will not affect the relationship between sales and variable costs.

1. Determine for 2006 the total fixed costs and the total variable costs.

2. Determine for 2006 (a) the unit variable cost and (b) the unit contribution margin.

3. Compute the break-even sales (units) for 2006.

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 $328,000 for income from operatons that was earned in 2006.

6. Determine the maximum income from operatons possible with the expanded plant.

7. If the proposed is accepted and sales remain at the 2006 level, what will the income or

loss from operations be for 2007?

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

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#### Solution Summary

Excel file contains all the steps, solution and formulas for calculating BEP, fixed cost variable cost.