Question

Break-Even Sales Under Present and Proposed Conditions

Darby Company, operating at full capacity, sold 122,850 units at a price of $108 per unit during the current year. Its income statement for the current year is as follows:

Sales			$13,267,800
Cost of goods sold			6,552,000
Gross profit			$6,715,800
Expenses:
Selling expenses	$3,276,000
Administrative expenses	3,276,000
Total expenses			6,552,000
Income from operations			$163,800

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 $163,800 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

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Darby Company
Answer 1
Type of cost	Total Amount	Variable cost %	Variable cost	Fixed cost %	Fixed cost
Cost of goods sold	6,552,000.00	70%	4,586,400.00	30%	1,965,600.00
Selling expenses	3,276,000.00	75%	2,457,000.00	25%	819,000.00
Administrative expenses	3,276,000.00	50%	1,638,000.00	50%	1,638,000.00
	13,104,000.00		8,681,400.00		4,422,600.00

Total variable costs	8,681,400.00
Total fixed costs	4,422,600.00
Answer 2	Amount $
Total variable costs	8,681,400.00
Units sold	122,850.00
Variable cost per unit	70.67
Sell price	108.00
Contribution per unit	37.33
Contribution margin ratio	34.57%
Answer 3	Amount $
Total fixed costs	4,422,600.00
Contribution per unit	37.33
Breakeven units	118,463.00
Answer 4
Total fixed costs	4,422,600.00
Add: expansion costs	108,000.00
Revised fixed costs	4,530,600.00
Contribution per unit	37.33
Breakeven units	121,355.00
Answer 5
Total fixed costs	4,530,600.00
Add: expansion costs	108,000.00
Revised fixed costs	4,638,600.00
Add: Target income from operations	163,800.00
Target Contribution	4,802,400.00
Contribution per unit	37.33
Units to be sold	128,636.00
Sell price	108.00
Sales $	13,892,688.00
Answer 6
Increase in sales	1,080,000.00
Contribution margin ratio	34.57%
Contribution margin	373,333.33
Less: expansion costs	108,000.00
Increase in income from operations	265,333.33
Add: current income from operations	163,800.00
Maximum income from operations possible	429,133.00
Answer 7
Current income from operations	163,800.00
Less: expansion costs	108,000.00
Income from operations for the following year	55,800.00

Answer 8

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