McKnight Company sells flags with team logos. McKnight has fixed costs of $639,600 per year plus variable costs of $4.20 per flag. Each flag sells for $12.00.

Requirement 1. Use the equation approach to compute the number of flags McKnight must sell each year to break even. First, select the formula to compute the required sales in units to break even.

Net sales revenue – Variable costs – Fixed costs = Target profit
Rearrange the formula you determined above and compute the required number of flags to break even.
The number of flags McKnight must sell each year to break even is 82,000.
Requirement 2. Use the contribution margin ratio approach to compute the dollar sales McKnight needs to earn $32,500 in operating income for 2016. (Round the contribution margin ratio to two
decimal places.)Begin by showing the formula and then entering the amounts to calculate the required sales dollars to earn 32,500 in operating income. (Round the required sales in dollars up to the
nearest whole dollar. For example, $10.25 would be rounded to $11. Abbreviation used: CM = contribution margin.)
( Fixed costs + Target profit ) / CM ratio = Required sales in dollars
( $639,600 + $32,500 ) / 65.00 % = $1,034,000
Requirement 3. Prepare McKnight’s contribution margin income statement for the year ended December 31, 2016, for sales of 73,000 flags. (Round your final answers up to the next whole number.) (Use
parentheses or a minus sign for an operating loss.)
McKnight Company
Contribution Margin Income Statement
Year Ended December 31, 2016
Sales Revenue $876,000
Variable Costs 306,600
Contribution Margin 569,400
Fixed Costs 639,600
Operating Income (Loss) $(70,200)
Requirement 4. The company is considering an expansion that will increase fixed costs by 23%
and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should
McKnight undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.) (Use the equation approach.)Begin by selecting the formula to compute the required
sales in units to break even under the expansion plan.
Net sales revenue – Variable costs – Fixed costs = Target profit
Rearrange the formula you determined above and compute the required number of flags to break even under the expansion plan.

Under the expansion plan, the breakeven point in units would be 109,265 flags.

Under the expansion plan, the breakeven point in dollars would be $1,311,180

Should McKnight undertake the expansion? Give your reasoning.
McKnight should only undertake the expansion if expected profits from the expansion are greater than the expected costs.