In: Accounting
Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 114,800 units at a price of $129 per unit during the current year. Its income statement is as follows:
Sales | $14,809,200 | ||
Cost of goods sold | 5,246,000 | ||
Gross profit | $9,563,200 | ||
Expenses: | |||
Selling expenses | $2,623,000 | ||
Administrative expenses | 1,591,000 | ||
Total expenses | 4,214,000 | ||
Income from operations | $5,349,200 |
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 $1,161,000 in yearly sales. The expansion will increase fixed costs by $154,800, 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.
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
$5,349,200 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?
Choose the correct answer.