Question

1. Break-Even Sales Under Present and Proposed Conditions

Darby Company, operating at full capacity, sold 148,400 units at a price of $93 per unit during the current year. Its income statement is as follows:

Sales			$13,801,200
Cost of goods sold			4,898,000
Gross profit			$8,903,200
Expenses:
Selling expenses	$2,449,000
Administrative expenses	1,457,000
Total expenses			3,906,000
Income from operations			$4,997,200

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 $1,209,000 in yearly sales. The expansion will increase fixed costs by $161,200, 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 $4,997,200 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?
$  

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.

2.

Break-Even Sales and Cost-Volume-Profit Chart

For the coming year, Cleves Company anticipates a unit selling price of $128, a unit variable cost of $64, and fixed costs of $697,600.

Required:

1. Compute the anticipated break-even sales (units).
units

2. Compute the sales (units) required to realize a target profit of $262,400.
units

3. Construct a cost-volume-profit chart, assuming maximum sales of 21,800 units within the relevant range. From your chart, indicate whether each of the following sales levels would produce a profit, a loss, or break-even.

$1,958,400
$1,740,800
$1,395,200
$1,049,600
$832,000

4. Determine the probable income (loss) from operations if sales total 17,400 units. If required, use the minus sign to indicate a loss.
$  

Answer 1

1.

Total variable costs = 4,898,000*60% + 2,449,000*50% + 1,457,000*30%

= $4,600,400

Total Fixed Costs = 4,898,000*40% + 2,449,000*50% + 1,457,000*70%

= $4,203,600

2.Unit variable cost = total variable cost/number of units ‘

= 4,600,400/148,400

= $31 per unit

Unit contribution margin = unit selling price – unit variable cost

= $93-$31

= $62 per unit

3.Break even units = Total Fixed costs/unit contribution margin

= 4,203,600/62

= 67,800 units

4.Proposed program = (4,203,600+161,200)/62

= 70,400 units

5.Desired Income = $4,997,200

+Fixed Costs 4,364,800

Desired Contribution Margin = $9,362,000

Unit contribution Margin = $62

Number of units =151,000 units

6.Maximum Income:

Maximum Sales = 13,801,200+1,209,000 = $15,010,200

Contribution Margin = 15,010,200*62/93 = $10,006,800

Less: Fixed Costs = $4,364,800

Maximum Income = $5,642,000

7.

Income = 4,997,200-161,200 = $4,836,000

8. b In favor of the proposal because of the possibility of increasing income from operations.