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 74,250 units at a price of $99 per unit during the current year. Its income statement for the current year is as follows:

Sales			$7,350,750
Cost of goods sold			3,630,000
Gross profit			$3,720,750
Expenses:
Selling expenses	$1,815,000
Administrative expenses	1,815,000
Total expenses			3,630,000
Income from operations			$90,750

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 $693,000 in yearly sales. The expansion will increase fixed costs by $69,300, 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 $90,750 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.

Choose the correct answer.

Answer 1

Question 1

	A	B	C = A* B
Particulars	Total Cost	Variable Cost %	Variable Costs
Cost of Goods Sold	36,30,000	70%	25,41,000
Selling Expenses	18,15,000	75%	13,61,250
Administrative Expenses	18,15,000	50%	907,500
Total Variable Costs			48,09,750

Particulars	Total Cost	Fixed Cost %	Fixed Costs
Cost lof Goods Sold	36,30,000	30%	10,89,000
Selling Expenses	18,15,000	25%	453,750
Administrative Expenses	18,15,000	50%	907,500
Total Fixed Costs			24,50,250

Question 2

Unit Variable Costs = Total Variable Costs / 74,250 Units

Units Variable Costs = 48,09,750 / 74,250

Unit Variable Costs = $ 64.78

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit

Contribution Margin per Unit = 99 - 64.78

Contribution Margin per Unit = $ 34.22

Question 3

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

Break Even Point in Units = 24,50,250 / 34.22

Break Even Point in Units = 71,603 Units

Question 4

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

Fixed Costs = 24,50,250 + 69,300 (Proposed Increase)

Fixed Costs = $ 25,19,550

Break Even Point in Units = 25,19,550 / 34.22

Break Even Point in Units = 73,628 Units

Question 5

Net Income = Contribution Margin - Total Fixed Costs

Net Income = 90,750

Total Fixed Costs = $ 25,19,550

Contribution Margin = Units Sold.* Contribution Margin per Unit

Contribution Margin = 34.22 * Units Sold

90,750 = 34.22 * Units Sold - 25,19,550

34.22 * Units Sold = 90,750 + 25,19,550

Units Sold = 26,10,300 / 34.22

Units Sold = 76,280 Units

Question 6

Contribution Margin Ratio = Contribution Margin per Unit / Sales Price per Unit * 100

Contribution Margin Ratio = 34.22 / 99 * 100

Contribution Margin Ratio = 34.57%

Maximum Income from Plant after Proposed Change = Contribution Margin Ratio * Sales - Fixed Cost

= (34.57% * 80,43,750) - 25,19,550

= $ 260,825

Maximum Income from Proposed Change = $ 260,825

Sales Revenue = 73,50,750 + 693,000 = $ 80,43,750

Question 7

Income from Proposed Change if there's no Change in Sales = Contribution Margin Ratio * Current Year Sale - Fixed Costs

= (34.57% * 73,50,750) - 25,19,550

= $ 21,285

Question 8

Option B is the Correct Answer

Notes

There are Normal Rounding off being done due to most of the answer in fraction.