Question

Determine the amount of sales (units) that would be necessary under

Break-Even Sales Under Present and Proposed Conditions

Darby Company, operating at full capacity, sold 122,850 units at a price of $114 per unit during the current year. Its income statement for the current year is as follows:

Sales			$14,004,900
Cost of goods sold			6,916,000
Gross profit			$7,088,900
Expenses:
Selling expenses	$3,458,000
Administrative expenses	3,458,000
Total expenses			6,916,000
Income from operations			$172,900

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

	Variable		Fixed
Cost of goods sold	70%		30%
Selling expenses	75%		25%
Administrative expenses	50%		50%

Management is considering a plant expansion program that will permit an increase of $1,254,000 in yearly sales. The expansion will increase fixed costs by $125,400, but will not affect the relationship between sales and variable costs.

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $172,900 of income from operations that was earned in the current year. Enter the final answers rounded to the nearest whole number.

6. Determine the maximum income from operations possible with the expanded plant. Enter the final answer rounded to the nearest dollar.

7. If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year? Enter the final answer rounded to the nearest dollar.

Answer 1

Answer 1:

Calculation of fixed cost and contribution per unit:

Sales (units) that would be necessary under for Break-Even Sales under Present Conditions = Fixed cost / Contribution per unit

= 4668300 / 39.407407

= 118462.50 units

Sales (units) that would be necessary under for Break-Even Sales under Present Conditions = 118,462.50 units

Answer 2:

Sales (units) that would be necessary under for Break-Even Sales under Proposed Conditions = Fixed cost / Contribution per unit

The expansion will increase fixed costs by $125,400, but will not affect the relationship between sales and variable costs.

Hence:

Sales (units) that would be necessary under for Break-Even Sales under Proposed Conditions = (4668300 + 125400) / 39.407407

=121,644.64

Sales (units) that would be necessary under for Break-Even Sales under Proposed Conditions = 121,644.64

Answer 5:

Sales (units) that would be necessary under the proposed program to realize the $172,900 = (Fixed cost + Target operating profit) /Contribution per unit

= (4668300 + 125400 + 172,900) / 39.407407

= 126032.14 Units

Sales (units) that would be necessary under the proposed program to realize the $172,900 = 126032 Units

Answer 6:

Plant expansion program that will permit an increase of $1,254,000

Maximum income from operation possible = $480,981

Answer 7:

Sales Variable cost Contribution Fixed costs Income from operations $14,004,900.00 $9,163,700.00 $4,841,200.00 -4668300+ 125400-$4,793,700.00 $47,500.00 65.4321%

If the proposal is accepted and sales remain at the current level, the income from operations be for the following year = $47,500