Question

Darby Company, operating at full capacity, sold 159,800 units at a price of $51 per unit during the current year. Its income statement is as follows:

Sales			$8,149,800
Cost of goods sold			2,890,000
Gross profit			$5,259,800
Expenses:
Selling expenses	$1,445,000
Administrative expenses	867,000
Total expenses			2,312,000
Income from operations			$2,947,800

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 $714,000 in yearly sales. The expansion will increase fixed costs by $95,200, 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 $2,947,800 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 an

Answer 1

Calculation of Total variable costs and total fixed expenses

	Variable expenses	Fixed expenses
Cost of goods sold	(2890000*60%)= 1734000	(2890000*40%)= 1156000
Selling expenses	(1445000*50%)= 722500	(1445000*50%)= 722500
Administrative expenses	(867000*30%)= 260100	(867000*70%)= 606900
Total	$2716600	$2485400

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $2947800 of income from operations that was earned in the current year.

Variable expenses per unit= $2716600/159800= $17

Contribution margin per unit= (Sales-Variable expenses)/Number of units

= $51-17= $34 per unit

Fixed expenses= $2485400+95200= $2580600

Break even sales= (Fixed expenses+Target income)/Contribution margin per unit

= ($2580600+2947800)/34

= 162600 units

6. Determine the maximum income from operations possible with the expanded plant

Sales (8149800+714000)	$8863800
Less: Variable expenses (8863800/51*17)	2954600
Contribution margin	5909200
Less: Fixed expenses (2485400+95200)	(2580600)
Income from operations	$3328600

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 (loss) from operations= Units sold*Contribution margin per unit-Fixed expenses

= (159800*$34)-2580600= $2852600 income

8. Based on the data given, would you recommend accepting the proposal?

The company should accept the proposal as when the company accept the proposal there is chances that the income from operations will increases.

So, the answer is option B) In favor of the proposal because of the possibility of increasing income from operations.