Darby Company, operating at full capacity, sold 122,200 units at a price of $102 per unit during the current year. Its income statement is as follows:Sales $12,464,400Cost of goods sold 4,420,000Gross profit $8,044,400Expenses: Selling expenses$2,210,000 Administrative expenses1,326,000 Total expenses 3,536,000Income from operations $4,508,400The division of costs between variable and fixed is as follows: VariableFixedCost of goods sold60% 40% Selling expenses50% 50% Administrative expenses30% 70% Management is considering a plant expansion program for the following year that will permit an increase of $1,122,000 in yearly sales. The expansion will increase fixed costs by $149,600, but will not affect the relationship between sales and variable costs. 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?a. In favor of the proposal because of the reduction in break-even point.b. In favor of the proposal because of the possibility of increasing income from operations.c. In favor of the proposal because of the increase in break-even point.d. Reject the proposal because if future sales remain at the current level, the income from operations will increase.e. 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.

Variable cost: Variable cost is a cost that varies according to the output produced or any service…

Answered: Darby Company, operating at full…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Darby Company, operating at full capacity, sold 122,200 units at a price of $102 per unit during the current year. Its income statement is as follows:

Sales		$12,464,400
Cost of goods sold		4,420,000
Gross profit		$8,044,400
Expenses:
Selling expenses	$2,210,000
Administrative expenses	1,326,000
Total expenses		3,536,000
Income from operations		$4,508,400

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 $1,122,000 in yearly sales. The expansion will increase fixed costs by $149,600, but will not affect the relationship between sales and variable costs.

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?
a. In favor of the proposal because of the reduction in break-even point.
b. In favor of the proposal because of the possibility of increasing income from operations.
c. In favor of the proposal because of the increase in break-even point.
d. Reject the proposal because if future sales remain at the current level, the income from operations will increase.
e. 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.

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