[arskinner]

I know we are not supposed to copy and paste questions, but I'm going to because that's the easiest way I know to do it.


Battonkill Company, operating at full capacity, sold 118,500 units at a price of $81 per unit during 2012. Its income statement for 2012 is as follows:

Sales $9,598,500
Cost of goods sold 3,402,000
Gross profit $6,196,500
Expenses:
Selling expenses $1,701,000
Administrative expenses 1,026,000
Total expenses 2,727,000
Income from operations $3,469,500

The division of costs between fixed costs and variable costs is as follows:
Fixed Variable
Cost of goods sold 40% 60%
Selling expenses 50% 50%
Administrative expenses 70% 30%

Management is considering a plant expansion program that will permit an increase of $972,000 in yearly sales. The expansion will increase fixed costs by $129,600, but will not affect the relationship between sales and variable costs.

Instructions:
1. Determine for 2012 the total fixed costs and the total variable costs.
Total fixed costs: $ 2929500

Total variable costs: $ 3199500

2. Determine for 2012 (a) the unit variable cost and (b) the unit contribution margin.
Unit variable cost: $ 27

Unit contribution margin: $ 54

3. Compute the break-even sales (units) for 2012.
54250 units
4. Compute the break-even sales (units) under the proposed program
56650 units
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $3,469,500 of income from operations that was earned in 2012.
120900 units
6. Determine the maximum income from operations possible with the expanded plant.
$

I have figured out numbers 1-5, and I know the answers are correct. I am completely stumped with number 6. I know that:

sales - fixed costs - variable costs = income from operations

I think maybe I am figuring variable costs wrong, but I'm not positive. I just know that I'm messing up the equation somewhere. Please help!!

[ArcSine]

It's not the 'cut and paste' per se that's a problem, it's when someone cuts and pastes their question, then sits back and waits to be spoon-fed the answer---that's what's prohibited.

When someone here is assisting with an answer, it's frequently helpful if they can see the actual question. In your case in particular, it would've been difficult to help with Q 6 without seeing the background data in their entirety. Hence, your cut-n-paste was appropriate in this context.

Most importantly, though, is that you followed through by showing that you had tackled and solved the first 5 parts of the question. It's a lack of any visible effort that relegates questions to the "forever ignored" pile.

OK, 'nuff of that. Question 6 is a puzzler, in the sense that the obvious answer seems too easy. The background info implies that sales (in units) and unit price have a simple linear relationship. Ditto the production quantity and the unit variable cost.

When those two conditions are met, then net profit is just a linear function of units sold. Thus in this Battonkill case, max profit is achieved at max output.

A question in the nature of Question 6 is more commonly associated with a scenario in which profit is a nonlinear function of units produced, thereby creating a situation where there is some "sweet spot" at which net profit is maximized.

So I don't know, while Battonkill would simply maximize their bottom line by expanding out to capacity, that seems too easy for the book to even bother asking about. Is there any other info associated with this question?

[arskinner]

That is the question in it's entirety... no more information.

[ArcSine]

Then the Q 6 can be restated as, "After the expansion, the range of production possibility is from 0 units to _____ units. At what production point within this range is net income maximized?"

Pretty straightforward computation.

I'd guess that maybe they're trying to make the point that expansion, by itself, can't be automatically deemed desirable without further analysis. Specifically, the expansion is favorable only if it makes possible enough additional production such that not only are the additional fixed costs covered, but also that sufficient additional units can be sold so that the pre-expansion net income can be bested.

It's Q 5 that makes me suspect that as the purpose of Q 6. In Q 5 you determine that the company would have to sell 120,900 units after expansion in order to match the best net income they had pre-expansion. Then during the process of calculating Q 6 you note that the expansion actually makes possible more than 120,900 units, implying that if they increased their production level further, up to the max permitted by the expansion, they'd actually exceed their pre-expansion max net profit.

So again, while it seems on its face that the computation for Q 6 doesn't contribute much educational value, maybe they're figuring on making the point that expansion might have negative, zero, or positive value; it depends on how much additional production is made possible.

[missada]

Well, since some of us come here for help rather than to just be looked down upon. I will answer this question. I myself was stuck when I came to this computation but have managed to figure it out. I hope this helps another student who becomes stuck and like me may panic a bit when that happens.

Here are the steps to Part #6:

1. To figure out your new sales you add the 2012 sales + new 2013 expansion sales.

2. To determine the new variable cost you will divide the new 2013 expansion sales by the 2012 sales listed. Take that percentage and multiply the units by this percentage (units sold X your found percentage). After this, simply multiply the new amount of units by the unit variable cost (new units calculated X unit variable cost). This will then be the variable cost you will subtract.

3. Add your 2012 fixed cost + 2013 expansion fixed cost. This will be the fixed cost you will subtract.

4. To find the Income from Operations you will just subtract Variable & Fixed costs from Sales.

Sales - 10,570,500
Variable Cost - 3,519,450
Contribution - 7,051,050
Fixed Cost - 3,059,100
Income from Operations - 3,991,950 (maximum)

I hope this helps someone!