Break-Even Sales Under Present and Proposed Conditions Darby Company, operating at full capacity, sold 118,500 units at...
Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 118,500 units at a price of $126 per unit during the current year. Its income statement is as follows:
| Sales | $14,931,000 | ||
| Cost of goods sold | 5,292,000 | ||
| Gross profit | $9,639,000 | ||
| Expenses: | |||
| Selling expenses | $2,646,000 | ||
| Administrative expenses | 1,596,000 | ||
| Total expenses | 4,242,000 | ||
| Income from operations | $5,397,000 |
The division of costs between variable and fixed is as follows:
| Variable | Fixed | |||
| Cost of goods sold | 60% | 40% | ||
| Selling expenses | 50% | 50% | ||
| Administrative expenses | 30% | 70% | ||
Management is considering a plant expansion program for the following year that will permit an increase of $1,134,000 in yearly sales. The expansion will increase fixed costs by $151,200, 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.
| Total variable costs | $ |
| Total fixed costs | $ |
2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
| Unit variable cost | $ |
| Unit contribution margin | $ |
3. Compute the break-even sales (units) for the
current year.
units
4. Compute the break-even sales (units) under
the proposed program for the following year.
units
5. Determine the amount of sales (units) that
would be necessary under the proposed program to realize the
$5,397,000 of income from operations that was earned in the current
year.
units
6. Determine the maximum income from operations
possible with the expanded plant.
$
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?
$ Income
8. Based on the data given, would you recommend accepting the proposal?
- In favor of the proposal because of the reduction in break-even point.
- In favor of the proposal because of the possibility of increasing income from operations.
- In favor of the proposal because of the increase in break-even point.
- Reject the proposal because if future sales remain at the current level, the income from operations will increase.
- 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.
Homework Answers
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