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    Cajun Foods Inc. - Break Even Sales

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    Cajun Foods Inc operating at full capacity, sold 29,200 units at a price of $90 per unit during 2006. Its income statement for 2006 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 expansion 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 of income from operations that was earned in 2006.
    6. Determine the maximum income from operations possible with the expanded plant.
    7. If the proposal 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 Preview

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

    Cost of goods sold (25% x 1,600,000) 400,000
    Selling Expenses (40% x 300,000) 120,000
    Administrative expenses (80% x 400,000) 320,000
    Total fixed costs 840,000

    Cost of goods sold (75% x 1,600,000) 1,200,000
    Selling Expenses (60% x 300,000) 180,000
    Administrative expenses (20% x 400,000) 80,000
    Total variable costs 1,460,000

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

    Solution Summary

    This solution is comprised of a detailed explanation to find break-even sales under present and proposed conditions for Cajun Foods Inc.

    $2.19

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