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 116,100 units at a price of $111 per unit during the current year. Its income statement for the current year is as follows:

Sales			$12,887,100
Cost of goods sold			6,364,000
Gross profit			$6,523,100
Expenses:
Selling expenses	$3,182,000
Administrative expenses	3,182,000
Total expenses			6,364,000
Income from operations			$159,100

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 $999,000 in yearly sales. The expansion will increase fixed costs by $99,900, 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 $159,100 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

1.

total variable cost	$8,432,300
total fixed cost	$4,295,700

2.

unit variable cost	$73
unit contribution margin	$38

contribution margin = sale price - variable cost

3.

break even sale = fixed cost / contribution margin

= 4,295,700/38

= 113,045 units

4.

break even analysis = 4,395,600 / 38

= 212,945 units

in new proposal margin contribution remain same because its sale and variable cost have same

5.units required for sale to earn 159,100 on new proposed = fixed income + required profit / contribution per unit

= 4,395,600 + 159,100 / 73

= 4,554,700/73

= 62,393

or in amount = 62,393 * 111 = 6,925,623

6.

total income = total sale - total variable cost - total fixed cost

= 13,886,100 - 9,085,967 - 4,395,600

=404,533

total sale = 12,887,100 + 999,000

= 13,886,100

total units = 9000 + 116,100

= 125,100 units

total variable cost = 9,085,967

7.

income = sale - variable cost - fixed cost

= 12,887,100 - 8,432,300 - 4,395,600

= 49,200

8. option b is correct we accept the proposal because there is increase of income at high level when plant work at full new capacity