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 106,650 units at a price of $66 per unit during the current year. Its income statement for the current year is as follows:

Sales			$7,038,900
Cost of goods sold			3,476,000
Gross profit			$3,562,900
Expenses:
Selling expenses	$1,738,000
Administrative expenses	1,738,000
Total expenses			3,476,000
Income from operations			$86,900

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 $594,000 in yearly sales. The expansion will increase fixed costs by $59,400, 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 $86,900 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.

Answer 1

total variable costs and the total fixed costs for the current year.
	Total Cost	Variable		Fixed
Cost of goods sold	3476000	70%	2433200	30%	1042800
Selling expenses	1738000	75%	1303500	25%	434500
Administrative expenses	1738000	50%	869000	50%	869000
Total			4605700		2346300
the unit variable cost and (b) the unit contribution margin
Unit Variable Cost = Total Variable Cost / No Of Units
=4605700/106650
=43.19
Contribution Margin = Sales Price Per Unit - Variable Cost Per Unit
= 66-43.19
=22.81	Per Unit
break-even sales (units) for the current year.
= Fixed Cost / Contribution Margin Per Unit
=2346300/22.81
=102863 Unit
break-even sales (units) under the proposed program for the following year.
= Fixed Cost / Contribution Margin Per Unit
= (2346300+59400)22.81
=105467 Units