Portman company operating at full capacity sold 1000000 units at a price of $188 per unit during the current year , it’s income statement is as follows

Portman Company

1. The total variable costs and the total fixed costs for the current year are:

Total variable costs $88,000,000

Total fixed costs      $40,000,000

2. Determination of (a) the unit variable cost and (b) the unit contribution margin for the current year.

a) Unit variable cost               $88

b) Unit contribution margin   $100

3. The break-even sales (units) for the current year are:

= 400,000 units.

4. The break-even sales (units) under the proposed program for the following year are:

= 450,000 units.

5. The amount of sales (units) that would be necessary under the proposed program to realize the $60,000,000 of operating income that was earned in the current year is:

= 1,050,000,000 units.

6. The maximum operating income possible with the expanded plant is:

= $61,000,000.

7. If the proposal is accepted and sales remain at the current level, the operating income or loss be for the following year will be:

= $55,000,000.

8. Based on the data given (1 - 6), would you recommend accepting the proposal?

In favor of the proposal because of the possibility of increasing income from operations.

Explanation:

a) Data and Calculations:

Sales units = 1,000,000

Selling price = $188

                                                   Total

Sales                   $188,000,000

Cost of goods sold          (100,000,000)

Variable cost of goods sold = $70,000,000

Fixed cost of goods sold =      $30,000,000

Gross profit                      $88,000,000

Expenses:    

Selling expenses             $16,000,000

Variable selling expenses $12,000,000

Fixed selling expense = $4,000,000  

Administrative expenses  12,000,000

Variable administrative expenses = $6,000,000

Fixed administrative expenses = $6,000,000  

Total expenses               (28,000,000)

Operating income         $60,000,000

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

                     Variable      Fixed

Cost of goods sold          70%30%  

Selling expenses                 75%         25%  

Administrative expenses50%         50%  

                                                           Total           Unit Cost

Variable cost of goods sold =     $70,000,000      $70

Variable selling expenses             12,000,000         12

Variable administrative expenses 6,000,000          6

Total variable costs =                 $88,000,000      $88

Contribution margin = $100 ($188 - $88)

Fixed cost of goods sold =       $30,000,000

Fixed selling expense =                4,000,000  

Fixed administrative expenses = 6,000,000

Total fixed costs =                    $40,000,000

Break-even sales units = $40,000,000/$100 = 400,000 units

Proposal:

Sales revenue increase = $11,280,000

Fixed costs by $5,000,000 to $45,000,000 ($40 million + $5 million)

Sales units increase = 60,000 ($11,280,000/$188)

Break-even sales units = 450,000 ($45,000,000/$100)

Units to realize target profit of $60,000,000:

= ($45,000,000 + $60,000,000)/$100

= $105,000,000/$100

= 1,050,000,000 units

Profit with the expanded plan

= Total contribution - Fixed Costs

= $100 * 1,060,000 - $45,000,000

= $106,000,000 - $45,000,000

= $61,000,000

With sales at current level of 1,000,000 units

Sales revenue =      $188,000,000

Variable costs            88,000,000

Contribution           $100,000,000

Fixed costs                45,000,000

Operating income  $55,000,000

i believe that it is a 45% chance.