Question

#9 - 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 75,600 units at a price of $120 per unit during the current year. Its income statement for the current year is as follows:

Sales			$9,072,000
Cost of goods sold			4,480,000
Gross profit			$4,592,000
Expenses:
Selling expenses	$2,240,000
Administrative expenses	2,240,000
Total expenses			4,480,000
Income from operations			$112,000

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 $720,000 in yearly sales. The expansion will increase fixed costs by $72,000, 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 $112,000 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

Answer 1

Variable and Fixed cost
			Variable	Fixed
Cost of goodds sold			3136000	1344000
Selling expenses			1680000	560000
Admin expense			1120000	1120000
Total			5936000	3024000
Req 2.
Total variable cost :			5936000
Divide: Number of units			75600
VC per unit			78.52
Selling price per unit			120
CM per unit			41.48
Req 3.
Break even units in current year: Total fixed cost / CM per unit
			3024000/41.48 = 72903 units
Req 4.
Break even units in new program = 3024000+72000 /41.48 = 74638 units
Req 5.
Target contribution = 3024000+72000+112000 = 3208000
target sales units = Target contribution/ CM per unit
		3208000 /41.48 = 77339 units
Req 6.
Total sales possible (9072000+720000)				9792000
Number of sales units (9792000/120)				81600
CM pere unit				41.48
Total contribution				3384768
Less: Fixed cost				3096000
Net income possible				288768
Req 7.
Sales at current yr				75600
CM pere unit				41.48
Total contribution				3135888
Less: Fixed cost				3096000
Net income possible				39888