Question

Break-Even Sales Under Present and Proposed Conditions

Darby Company, operating at full capacity, sold 154,100 units at a price of $105 per unit during the current year. Its income statement is as follows:

Sales			$16,180,500
Cost of goods sold			5,740,000
Gross profit			$10,440,500
Expenses:
Selling expenses	$2,870,000
Administrative expenses	1,715,000
Total expenses			4,585,000
Income from operations			$5,855,500

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 $1,260,000 in yearly sales. The expansion will increase fixed costs by $168,000, 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.

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 $5,855,500 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?

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

Ques 1

	Variable	Fixed	Total
Cost of goods sold(60%/40%)	3,444,000	2,296,000	5,740,000
Selling expenses(50%/50%)	1,435,000	1,435,000	2,870,000
Administrative (30%/70%)	514,500	1,200,500	1,715,000
Total	5,393,500	4,931,500	10,325,000

Ques 2

Unit variable cost	$
Total variable costs	5,393,500
Total units	154,100
Variable cost ($ per unit)	35.00
Unit Contribution margin	$
Sales price	105.00
Variable cost ($ per unit)	35.00
Contribution margin per unit	70.00

Ques 3

Breakeven point (Units) = Fixed costs / contribution per unit
Fixed costs	4,931,500
Contribution per unit	70.00
Breakeven point (Units)	70,450

Ques 4

Fixed costs (W-1)	5,099,500
Contribution per unit	70.00
Breakeven point (Units)	72,850
(W-1)
Existing fixed costs	4,931,500
Increase in fixed costs	168,000
Revised fixed costs	5,099,500

Ques 5

Formula: (Fixed costs + target profit) / contribution per unit
Fixed costs	5,099,500
Add: Target profit	5,855,500
Contribution per unit	70.00
Target Units sold	156,500

Ques 6

Contribution margin	11,627,000
Less: Total fixed costs	5,099,500
Maximum income	6,527,500
(W-1)
Revised total sales	17,440,500
($5,637,600+ $1,260,000)
Contribution to sales ratio*	67%
Revised contribution margin	11,627,000
*($70 contribution per unit 105 sales price)

Ques 7

Sales	16,180,500
Variable costs	5,393,500
Contribution margin	10,787,000
Fixed costs	5,099,500
Net income	5,687,500

Ques 8

accepted because there is a possibility to increasing income from operations