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 70,200 units at a price of $81 per unit during the current year. Its income statement for the current year is as follows:

Sales			$5,686,200
Cost of goods sold			2,808,000
Gross profit			$2,878,200
Expenses:
Selling expenses	$1,404,000
Administrative expenses	1,404,000
Total expenses			2,808,000
Income from operations			$70,200

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 $486,000 in yearly sales. The expansion will increase fixed costs by $48,600, 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 $70,200 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 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

Required: 1 Cost of goods sold Selling Expenses Administrative Expenses Total Variable 1965600 1053000 702000 3720600 Fixed 842400 351000 702000 1895400 Required: 2 Unit variable cost = Total variable cost/ units produced Total variable cost units produced Unit variable cost 3720600 70200 53.00 | Units contribution margin = Selling price - Variable cost per unit Selling price Variable cost per unit Unit contribution margin 81.00 53.00 28.00 Required: 3 Break even point(units) = Fixed cost / Contribution margin per unit Fixed cost Contribution margin per unit Break even point (units) 1895400 28.00 67693

Required: 4 Break even point(units) = Fixed cost / Contribution margin per unit Fixed cost Increased Fixed cost Total New Fixed cost Contribution margin per unit Break even point (units) 1895400 48600 1944000 28.00 69429 Required: 5 Determined sales units = (New Fixed cost + Desire Income) / Contribution margin New Fixed cost Desired Income Contribution margin per unit Determined Sales units 1944000 70200 28.00 71936 Required: 6 Maximum Income from operation = Total New sales - Total New variable cost - Total Fixed cost Sales 5686200 Increased sales 486000 Total New sales 6172200 Variable cost 3720600 New variable cost 318000 Total New variable cost 4038600 Total New Fixed cost 1944000 Maximum Income from operation 189600

Number of units = Increase in sales / Price per unit New variable cost = Number of units * Unit variable cost Increased sales Price per unit Number of units Unit variable cost New Variable cost 486000 81 6000 53.000 318000 Required: 7 Net Income = Sales - Variable cost-New Fixed cost Sales Less: Variable cost Less: New Fixed cost Net Income 56862001 37206001 1944000 21600 Required: 8 Option: (b) In favor of the proposal because of the possibility of increasing income from operations