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 103,950 units at a price of $51 per unit during the current year. Its income statement for the current year is as follows: Sales $5,301,450 Cost of goods sold 2,618,000 Gross profit $2,683,450 Expenses: Selling expenses $1,309,000 Administrative expenses 1,309,000 Total expenses 2,618,000 Income from operations $65,450 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 $408,000 in yearly sales. The expansion will increase fixed costs by $40,800, 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 $65,450 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. $ Income 8. Based on the data given, would you recommend accepting the proposal? In favor of the proposal because of the reduction in break-even point. In favor of the proposal because of the possibility of increasing income from operations. In favor of the proposal because of the increase in break-even point. Reject the proposal because if future sales remain at the current level, the income from operations will increase. 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. b Feedback 1. Multiply the percentages for fixed and variable costs by each cost. 2. a. Divide the total variable costs by number of units. 2. b. Sales price per unit minus variable costs per unit equals contribution margin per unit. 3. Fixed costs divided by unit contribution margin equals break-even point. 4. Fixed costs under the proposed program divided by contribution margin equals new break-even point. 5. (Fixed costs + Target profit) divided by unit contribution margin equals sales units. 6. Determine the increase in units by dividing the sales increase by the price per unit. Add the additional revenue and additional fixed costs when calculating: Sales minus fixed and variable costs equals income from operations. 7. Subtract the additional fixed costs from the operating income. 8. Consider the break-even point and the sales needed for the proposed level. Learning Objective 2, Learning Objective 3. Check My Work Previous

Answer 1

Answer :-

S.no	Particulars	Amount($)
01	Sales	5,301,450
02	Less:-COGS	(2,618,000)
03	Gross profit	2,683,450
04	less:-Admin Overhead	(1,309,000)
05	less:- Selling and distribution	(1,309,000)
06	Net profit	65,450

Calculation of total variable and fixed cost :-

Particulars	Variable cost	Fixed Cost	Total cost
COGS	1832600(70%)	785400(30%)	2618000
Admin	654500(50%)	654500(50%)	1309000
S & D	981750(75%)	327250(25%)	1309000
TOTAL	3468850	1767150	5235000

# COGS = COST OF GOODS SOLD.

#ADMIN = ADMINSTRATIVE EXPENSES

# S & D = SELLING AND DISTRIBUTION.

Calculation of unit variable and contribution margin.

S.no	Particulars	Total($)	Per unit ($)
01	Sales	5301450	51
02	Less:- Variable cost	(3468850)	(33.37)
03	Contribution Margin (01-02)	1832600	17.63
04	Fixed Cost	(1767150)	-
05	Net profit	65450	-

(3) Calculation of Break even sales :-

Break even sales = break even point × sales price per unit.

Break even point = total fixed cost ÷ Contribution per unit.

= 1767150 ÷ 17.63

= 100235.3942

= 100,235 units (rounded off)

Break even sales = 100,235 units × 51 $

= $ 5,111,985.

(4) Calculation of break even under proposed plan.

Contribution per unit remains same because relation between sales and variable cost remain unchanged.

Break even sales(units) = Revised fixed cost ÷ Contribution margin

= 1,807,950 ÷ 17.63

=102549.63

= 102550. (Rounded off).

(5)Units required for attaining profit of $;65,450.

Required units = (Fixed cost + Desired profit) ÷ Contribution magin

= 1807950 + 65450 ÷17.63

= 1873400 ÷ 17.63

= 106262.0533

= 106262 (rounded off).

106262 sales units required to get profit of 65450 under proposed plan.

(6) Maximum possible income :-

Sale units in current plan = 103950.

Increase in sales = $ 408000 ÷ 51 per unit. = 8000 units.

# total sale units in proposed plan = 111950.

Contribution per unit = $ 17.63

Total contribution = $ 1973678.50

Less :- Fixed cost = ($ 1807950)

Net profit = $ 165728.50

Maximum income from operations possible = $ 165729.0 ( rounded off)

(7)

S.no	Particulars	Amount($)
01	Sales	5301450*
02	less:-Variable cost	(3735813**)
03	Contribution	1,565,637
04	Fixed cost	(1767150)
05	Net profit(loss)	(201513)

* Sales remains same

** variable cost = (103950 + 8000) units × 33.37 per unit.

(8) Based on the above calculation , proposal can be accepted if there is an increase in sales. In case no increase then better to reject the proposal.