In: Accounting
Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 99,700 units at a price of $78 per unit during the current year. Its income statement is as follows:
Sales | $7,776,600 | ||
Cost of goods sold | 2,756,000 | ||
Gross profit | $5,020,600 | ||
Expenses: | |||
Selling expenses | $1,378,000 | ||
Administrative expenses | 832,000 | ||
Total expenses | 2,210,000 | ||
Income from operations | $2,810,600 |
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 $624,000 in yearly sales. The expansion will increase fixed costs by $83,200, 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.
Total variable costs | $ |
Total fixed costs | $ |
2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
Unit variable cost | $ |
Unit contribution margin | $ |
3.
Compute the break-even sales (units) for the current year.
units
4.
Compute the break-even sales (units) under the proposed program for
the following year.
units
5.
Determine the amount of sales (units) that would be necessary under
the proposed program to realize the $2,810,600 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?