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 $135 per unit during the current year. Its income statement for the current year is as follows:

Sales			$13,486,500
Cost of goods sold			6,660,000
Gross profit			$6,826,500
Expenses:
Selling expenses	$3,330,000
Administrative expenses	3,330,000
Total expenses			6,660,000
Income from operations			$166,500

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 $1,080,000 in yearly sales. The expansion will increase fixed costs by $108,000, 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. 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 $166,500 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.:
$ ______ (income or loss?)

8. Based on the data given, would you recommend accepting the proposal?

A. In favor of the proposal because of the reduction in break-even point.

B. In favor of the proposal because of the possibility of increasing income from operations.

C. In favor of the proposal because of the increase in break-even point.

D. Reject the proposal because if future sales remain at the current level, the income from operations will increase.

E. 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 for question 8.

Answer 1

Solution 1			Calculation of Fixed and variable cost
	Particulars	Total	Variable	Fixed
	Cost of goods sold	6660000	4662000	1998000
	selling	3330000	2497500	832500
	admin	3330000	1665000	1665000
	Total		8824500	4495500
Solution 2	Unit variable cost and margin
	Sales per unit	135
	Variable cost per unit	88.33	(Total variable cost/ no of units sold)
	Margin	46.67
Solution 3	Break even sales units	= Fixed cost / contribution margin per unit
		= 4495500/ 46.67
		96325.26248
		or 96325
Solution 4	Break even sales unit	= Fixed cost + additional fixed cost/ margin per unit
		= (4495500+108000)/46.67
		98639.3829
		or 98639
Solution 5	Break even sales units	= proposed Fixed cost+ profit/ margin per unit
		= (4495500+108000+166500)/46.67
		102206.9852
		or 102207
Solution 6	Maximum income	Amount	Units
	Sales (existing + increased)	14566500	107900
	Less: variable	9530807
	Gp	5035693
	Less fixed	4603500
	Profit	432193
Solution 7	If sales remains at same level then new profit will be as follows:
	Existing profit	166500
	Less : new fixed cost	108000
	New profit	58500
Solution 8	Answer is b as there is possibility of increase in income .