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    Cost accounting: Break-even analysis

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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.