Question

1. 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 86,400 units at a price of $117 per unit during the current year. Its income statement for the current year is as follows:

   Sales			$10,108,800
   Cost of goods sold			4,992,000
   Gross profit			$5,116,800
   Expenses:
   Selling expenses	$2,496,000
   Administrative expenses	2,496,000
   Total expenses			4,992,000
   Income from operations			$124,800

   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 $936,000 in yearly sales. The expansion will increase fixed costs by $93,600, 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 $124,800 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.
   

Check My Work

Answer 1

Ans.

1.

	Total	Variable	Fixed	Variable Cost	Fixed Cost
Cost of Goods Sold	$ 4,992,000.00	70%	30%	$ 3,494,400.00	$ 1,497,600.00
Selling Expenses	$ 2,496,000.00	75%	25%	$ 1,872,000.00	$      624,000.00
Administrative Expenses	$ 2,496,000.00	50%	50%	$ 1,248,000.00	$ 1,248,000.00

Total Variable Cost	$ 6,614,400.00
Total Fixed Cost	$ 3,369,600.00

2.

Total Variable Cost (a)	$ 6,614,400.00
Units Produced (b)	86,400.00
Unit Variable Cost (a/b)	$                76.56

Selling Price	$              117.00
Less : Variable Cost per unit	$                76.56
Unit Contribution Margin	$                40.44

3.

Break even point = Fixed Cost / Unit Contribution margin

Break even point = $ 3,369,600 / $ 40.44 = 83,314.29 or 83,315 units

4.

Break even point proposed program

Existing Fixed Cost	$ 3,369,600.00
Increase in Fixed Cost	$        93,600.00
Revised Fixed Cost	$ 3,463,200.00
Unit Contribution Margin	$                40.44
Break even point	85,628.57

Break even point = 85,628.57 or 85,629 units

5.

Units need to achieve profit of $ 124,800

Total Fixed Cost	$ 3,463,200.00
Profit	$      124,800.00
Total target needed	$ 3,588,000.00
Unit Contribution Margin	$                40.44
Determined Sales units	88,714.29

Sales unit = 88,714.29 or 88,715 units

6.

Sales	$ 10,108,800.00
Increased Sales	$        936,000.00
Total new sales	$ 11,044,800.00
Variable Cost	$    6,614,400.00
New Variable Cost (936,000 / 117) * (6,614,400 / 86,400)	$        612,445.00
Total new variable cost	$    7,226,845.00
Contribution	$    3,817,955.00
Total new fixed cost	$    3,463,200.00
Maximum Income from Operations	$        354,755.00

7.

Sales	$ 10,108,800.00
Less :Variable Cost	$    6,614,400.00
Less : New Fixed Cost	$    3,463,200.00
Net Income	$          31,200.00

8.

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

So correct option is b.