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 113,400 units at a price of $81 per unit during the current year. Its income statement for the current year is as follows:

Sales			$9,185,400
Cost of goods sold			4,536,000
Gross profit			$4,649,400
Expenses:
Selling expenses	$2,268,000
Administrative expenses	2,268,000
Total expenses			4,536,000
Income from operations			$113,400

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 $729,000 in yearly sales. The expansion will increase fixed costs by $72,900, but will not affect the relationship between sales and variable costs.

Required

1. Determine the total variable costs and the total fixed costs for the current year. Enter the final answers rounded to the nearest dollar. Total variable costs Total fixed costs 2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year. Enter the final answers rounded to two decimal places. Unit variable cost Unit contribution margin 3. Compute the break-even sales (units) for the current year. Enter the final answers rounded to the nearest whole number. units 4. Compute the break-even sales (units) under the proposed program for the following year. Enter the final answers rounded to the nearest whole number units 5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $113,400 of income from operations that was earned in the current year. Enter the final answers rounded to the nearest whole number. units 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. 8. Based on the data giv Income you recommend accepting the proposal? a. In favor of the propos b. In favor of the propos c. In favor of the proposal because of the increase in break-even point. d. Reject the proposal because if future sales remain at the current level, the income from operations will increase. e. Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales. of the reduction in break-even point. Loss of the possibility of increasing income from operations.

8. Based on the data given, would you recommend accepting the proposal?

1. In favor of the proposal because of the reduction in break-even point.
2. In favor of the proposal because of the possibility of increasing income from operations.
3. In favor of the proposal because of the increase in break-even point.
4. Reject the proposal because if future sales remain at the current level, the income from operations will increase.
5. Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.

Choose the correct answer.

Answer 1

Answer 1

Expense	Total	Variable	Fixed
Cost of Goods Sold	4536000	3175200	1360800
Selling Expense	2268000	1701000	567000
Admin Expense	2268000	1134000	1134000
Total		6010200	3061800

Answer 2

Total Variable Cost	6010200
No. of Units Sold	113400
Unit Variable Cost	53.00
Sales	9185400
Variable Costs:
Cost of Goods Sold	3175200
Selling Expense	1701000
Admin Expense	1134000
Total Variable Cost	6010200
Contribution Margin	3175200
Contribution Margin (%)	34.57%
Contribution Margin	3175200
No. of Units Sold	113400
Unit Contribution margin	28.00

Answer 3

Fixed Cost	3061800
Unit Contribution margin	28.00
Breakeven Sales (Units)	109350

Answer 4

Unit Contribution margin	28.00
Breakeven Sales (Units)	1,11,953.57
Breakeven Sales (Units) Rounded off	1,11,954

Answer 5

Revised Fixed Cost	3134700
Desired Profit	113400
Contribution Margin to be recovered	3248100
Contribution Margin (%)	34.57%
Target Sales to earn profit of $ 113400	93,96,289

Answer 6

Increased Sales	729000
Additional Contribution from Increased Sales	252000
Additional Fixed Cost	72900
Additonal Net Income	179100
Existing net income	113400
Total revised Income	292500

Answer 7

If sales remains at current level even with plant expansion program, the income or loss will be as follows:

Existing Income from Operations	113400
Additional Fixed Cost	72900
Revised Net Income	40500

Answer 8

Based on the data given, it is recommended that the proposal be accepted be because of the possibility of increasing income from operations.