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 99,900 units at a price of $108 per unit during the current year. Its income statement for the current year is as follows:

Sales			$10,789,200
Cost of goods sold			5,328,000
Gross profit			$5,461,200
Expenses:
Selling expenses	$2,664,000
Administrative expenses	2,664,000
Total expenses			5,328,000
Income from operations			$133,200

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 $972,000 in yearly sales. The expansion will increase fixed costs by $97,200, 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 $133,200 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.
$

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?

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.

Answer 1

Answer 1. Detremine Total VC and Total Fixed Cost
Total Variable Cost			$7,059,600
Total Fixed Cost			$3,596,400
Total VC= VC of COG (70%) +VC of Selling Exp(75%) + VC of Adm. Exp(50%) =3,729600 +1,998,000+ 1,332,000 = $7,059,600 Tota Fixed Cost =1,598,400 (30%) +666,000(25%) +1,332,000(50%) = $3,596,400
2. Determine (a) unit Variable cost (b)unit Contribution Margin
(a) Unit Variable Costs = Total Variable Cost ÷ Sales unit
= $7,059,600 ÷ 99, 900 units = $70.667
(b) Unit Contribution Margin = Unit Selling Price - Unit Variable cost
= $108 −70.667 = $37.333
3. Calculate Break-even Sales (units) for current year
Break-Even Sales (units) = Total Fixed Cost ÷ Unit Contribution Margin
$3,596,400 ÷ $37.333 = 96,333 units
Total Sales in propsed Plan = $10,789,200 + $972,000 = $11,761,200
Total Fixed Cost in Proposed plan = $3,596,400 + $97,200 = $3,693,600
4. Break-Even Sales (units) under Proposed Plan
= Total Fixed Cost ÷ Unit Contribution Margin
= $3,693,600 ÷ $37.333 = 99,937 units
CM ratio does not change.
5. Sales Units to Earn earlier Target Profit ($133,200) = (Fixed Cost+TP) ÷ Unit CM
=($3,693,600 + $133,200) ÷ $37.333 =$3,826,800 ÷ $37.333 = 102,504 units
6. Maximum Income from operation with expanded capacity
= Proposed Sales - Proposed V. Cost - Proposed Fixed Cost
= $11,761,200 - 65.432037 % of VC - $3,693,600
= $11,761,200 - $7,695,593 - $3,693,600 = $372,007 = 372,000 Apro
VC Ratio = VC ÷ Sales = $70.6666÷ $108 = 65.432037%

7. If sales Remains Same and Proposal is accepted:

Profit (L oss) = $10,789,200 - ($7,059,600 + $3,596,400) - $97,200

= $10,789,200 - $10,656,000 - $97,200

= $133,200 -$97,200

= $36,000

8) Based on the data given and computed above

In favor of the proposal because of the possibility of increasing income from operations is $372,000 in place f $133,200.

All other option given are not in favor of accepting proposal except the above one.