In: Accounting
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 82,350 units at a price of $72 per unit during the current year. Its income statement for the current year is as follows:
Sales | $5,929,200 | ||
Cost of goods sold | 2,928,000 | ||
Gross profit | $3,001,200 | ||
Expenses: | |||
Selling expenses | $1,464,000 | ||
Administrative expenses | 1,464,000 | ||
Total expenses | 2,928,000 | ||
Income from operations | $73,200 |
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 $504,000 in yearly sales. The expansion will increase fixed costs by $50,400, but will not affect the relationship between sales and variable costs.
Required: Please Provide Answers Only
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
$73,200 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.
$
SOLUTION
1. Total variable cost = Cost of goods sold + Selling expenses + Administrative expenses
= (2,928,000*70%) + (1,464,000*75%) + (1,464,000*50%)
= 2,049,600 + 1,098,000 + 732,000
= $3,879,600
Total fixed costs = Cost of goods sold + Selling expenses + Administrative expenses
= (2,928,000*30%) + (1,464,000*25%) + (1,464,000*50%)
= 878,400 + 366,000 + 732,000
= $1,976,400
2. Unit variable cost = Total variable costs / Number of units
= $3,879,600 / 82,350 = $47.11
Unit contribution margin = Selling price - Unit variable cost
= $72 - $47.11 = $24.89
3. Break-even Sales Units = Total Fixed Costs / Unit Contribution margin
= $1,976,400 / 24.89 = 79,405 units
4. Break-even sales = Increased Fixed Cost / Unit Contribution margin
= $50,400 / 24.89
= 2,025 units
5. Amount of sales (units) = (Desired Income + Total Fixed Cost + Increased Fixed Cost) / Unit Contribution margin
= (73,200 + 1,976,400 + 50,400) / $24.89
= 2,100,000 / 24.89 = 84,371 units
6. No. of Sales (in units) increased due to expansion = 504,000 / 72 = 7,000 units
Maximum income from operations possible with expanded plan
= [(7,000+82,350)*$24.89] - (1,976,400 + 50,400)
= 2,223,922 - 2,026,800
= 197,122