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 112,050 units at a price of $129 per unit during the current year. Its income statement for the current year is as follows:

Sales			$14,454,450
Cost of goods sold			7,138,000
Gross profit			$7,316,450
Expenses:
Selling expenses	$3,569,000
Administrative expenses	3,569,000
Total expenses			7,138,000
Income from operations			$178,450

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 $1,290,000 in yearly sales. The expansion will increase fixed costs by $129,000, but will not affect the relationship between sales and variable costs.

Required:

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $178,450 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.
$ Income

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.

PARTS 5-8 I NEED HELP ON PLEASE

Answer 1

5. Sales (unit) to earn profit of $178450 in addition to current year's profit = (Total fixed cost + Desired profit)/Contribution per unit

= ($4947150 + $178450 + $178450)/$45 per unit

= 117868 units

6. Maximum income from operations possible with the expanded plant = $495376

7. If the proposal is accepted and sales remain at the current level, then income or loss from operations be for the following year = Existing income - Additional fixed cost

= $178450 - $129000

= $49450

8. If the proposal is accepted then Darby Company will earn additional $316926 net profit.

Hence offer need to be evaluated based on various market forces e.g.. product demand, availability of inputs etc. If company accepts this offer then breakeven point shall increase by 10000 units.

Assuming demand for the product is adequate then company should accept the offer because of the possibility of increasing income from operations.

Working Note:

Particulars Present Situation Unit $ per Unit 112,050 129 $ 14,454,450 Proposed situation Unit $ per Unit $ 122,050 129 15,744,450 Incremental Unit $ 10,000 1,290,000 112,050 45 2,141,400 4,996,600 7,316,450 122,050 45 2,141,400 5,442,526 8,160,524 445,926 844,074 892,250 2,676,750 892,250 2,915,639 112,050 24 122,050 24 238,889 Sales Less: Cost of goods sold Fixed Cost Variable Cost Gross Profit Less: Selling Expenses Fixed Cost Variable Cost Less: Administration Expenses Fixed Cost Variable Cost Less: Additional Fixed Cost Net Profit Contribution Total Fixed Cost Break-even point 1,784,500 1,784,500 112,050 16 122,050 16 1,784,500 1,943,759 129,000 495,376 5,442,526 4,947,150 4,947,150 159,259 129,000 316,926 445,926 129,000 129,000 112,050 45 122,050 178,450 4,996,600 4,818,150 4,818,150 45 10,000 108,048 45 110,941 45 2,893