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Break-Even Sales Under Present and Proposed Conditions Darby Company, operating at full capacity, sold 103,400 units at a price of $84 per unit during the current year
Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 103,400 units at a price of $84 per unit during the current year. Its income statement is as follows:
| Sales | $8,685,600 | ||
| Cost of goods sold | 3,080,000 | ||
| Gross profit | $5,605,600 | ||
| Expenses: | |||
| Selling expenses | $1,540,000 | ||
| Administrative expenses | 924,000 | ||
| Total expenses | 2,464,000 | ||
| Income from operations | $3,141,600 |
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 $672,000 in yearly sales. The expansion will increase fixed costs by $89,600, 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.
| Total variable costs | $fill in the blank 1 |
| Total fixed costs | $fill in the blank 2 |
2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
| Unit variable cost | $fill in the blank 3 |
| Unit contribution margin | $fill in the blank 4 |
3. Compute the break-even sales (units) for the current year.
fill in the blank 5 units
4. Compute the break-even sales (units) under the proposed program for the following year.
fill in the blank 6 units
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $3,141,600 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?
- In favor of the proposal because of the reduction in break-even point.
- In favor of the proposal because of the possibility of increasing income from operations.
- In favor of the proposal because of the increase in break-even point.
- Reject the proposal because if future sales remain at the current level, the income from operations will increase.
- 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: B
Expert Solution
| 1 | Total Variable Cost = | 28,95,200 | ||||
| Total Fixed Cost = | 26,48,800 | |||||
| Division of Variable & Fixed Cost | ||||||
| Total | Variable | Fixed | ||||
| Cost of Goods Sold | 30,80,000 | 60% | 18,48,000 | 40% | 12,32,000 | |
| Selling Expense | 15,40,000 | 50% | 7,70,000 | 50% | 7,70,000 | |
| Administrative Expense | 9,24,000 | 30% | 2,77,200 | 70% | 6,46,800 | |
| 28,95,200 | 26,48,800 | |||||
| 2 | Unit Variable Cost = | 28 | ||||
| Unit Contribution Margin = | 56 | |||||
| Total Variable Cost | 28,95,200 | |||||
| Total Number of Unit | 1,03,400 | |||||
| Variable Cost per Unit | 28 | |||||
| Sales | 86,85,600 | |||||
| Less: Variable Cost | 28,95,200 | |||||
| Contribution | 57,90,400 | |||||
| Total Number of Unit | 1,03,400 | |||||
| Contribution per Unit | 56 | |||||
| 3 | Break-Even Sale (Unit) = | 47,300 | ||||
| Total Fixed Cost | 26,48,800 | |||||
| Contribution per Unit | 56 | |||||
| Break-Even Unit | 47300 | |||||
| 4 | Break Even Sale (Unit) Proposed Program = | 48,900 | ||||
| Fixed Cost (26,48,800+89,600) | 27,38,400 | |||||
| Contribution per Unit | 56 | |||||
| Break-Even Unit | 48900 | |||||
| 5 | Unit sell to get income of 31,41,600 = | 1,05,000 | ||||
| (Fixed Cost + Target Income)/Contribution per Unit = | ||||||
| (27,38,400+31,41,600)56 = | 1,05,000 | |||||
| 6 | Maximum income from Operation with expanded Plant = | 35,00,000 | ||||
| Maximum Sales Revenue (86,85,600+6,72,000) = | 93,57,600 | |||||
| Maximum Unit can be sold (Sale price =84) | 1,11,400 | |||||
| Total Fixed Cost (26,48,800+89,600) = | 27,38,400 | |||||
| Operating Income=(Unit* CM per unit)- Fixed Cost | 35,00,000 | |||||
| (1,11,400*56)-27,38,400 = | ||||||
| 7 | Proposal Accepted,But Sales remains same = | 30,52,000 | Income | |||
| Operating Income=(Unit* CM per unit)- Fixed Cost | 30,52,000 | |||||
| (1,03,400*56)-27,38,400 = | ||||||
| 8 | Would You recommend accepting Proposal !!!!! | B | ||||
| B = In favor of the Proposal because of the possibility of increasing income from Operation | ||||||
| Sales Unit | 1,03,400 | |||||
| Selling Price | 84 | |||||
| Sales | 86,85,600 | |||||
| Cost of Goods Sold | 30,80,000 | |||||
| Gross Profit | 56,05,600 | |||||
| Expense: | ||||||
| Selling Expense | 15,40,000 | |||||
| Administrative Expense | 9,24,000 | |||||
| Total Expense | 24,64,000 | |||||
| Income From Operation | 31,41,600 |
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