Question

Break-Even Sales Under Present and Proposed Conditions

Darby Company, operating at full capacity, sold 148,400 units at a price of $135 per unit during the current year. Its income statement is as follows:

Sales			$20,034,000
Cost of goods sold			7,110,000
Gross profit			$12,924,000
Expenses:
Selling expenses	$3,555,000
Administrative expenses	2,115,000
Total expenses			5,670,000
Income from operations			$7,254,000

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 $1,620,000 in yearly sales. The expansion will increase fixed costs by $216,000, 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.

Total variable costs	$fill in the blank 1
Total fixed costs	$fill in the blank 2

2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.

Unit variable cost	$fill in the blank 3
Unit contribution margin	$fill in the blank 4

3. Compute the break-even sales (units) for the current year.
fill in the blank 5 units

4. Compute the break-even sales (units) under the proposed program for the following year.
fill in the blank 6 units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $7,254,000 of income from operations that was earned in the current year.
fill in the blank 7 units

6. Determine the maximum income from operations possible with the expanded plant.
$fill in the blank 8

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?
$fill in the blank 9 Income

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 answer.
b

Answer 1

1. Calculation of total variable and fixed cost

Cost	Variable	Fixed
Cost of good sold (7110000)	4266000	2844000
Selling expenses (3555000)	1777500	1777500
Administration expense (2115000)	634500	1480500
Total	6678000	6102000

2. Unit variable cost = Total Variable Cost / Total no. of unit

= 6678000/148400

= 45

Unit Contribution margin = sale price per unit - variable cost per unit

= 135 - 45

= 90

3. Break even sales = fixed cost / contribution per unit

= 6102000/90

= 67800

4. Break even sales under proposed plan = total fixed cost under proposed plan / contribution per unit

= (6102000+216000)/90

= 70200

5. Total no. of sales unit that would be necessary to realize 7254000 of income from operation

= (Desired profit + fixed cost)/ Contribution per unit

= (7254000+6318000)/90

= 150800

6.Income from operation under expended plan

Sales(20034000+1620000) (160400units)	21654000
Variable Cost (160400x45)	7218000
Fixed Cost	6318000
Income From operation	8118000

7. Income from operation if proposal is accepted and sales remains at the current level

Sales	20034000
Variable Cost (148400x45)	6678000
Fixed Cost	6318000
Income from operation	7038000

8. Answer = (b)