es Under Present and Proposed Conditions Darby Company, operating at full capacity, sold 124,200 units at a price of $84 per unit during the current year. Its income statement is as follows: Sales $10,432,800 Cost of goods sold 3,69
Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 124,200 units at a price of $84 per unit during the current year. Its income statement is as follows:
| Sales | $10,432,800 | ||
| Cost of goods sold | 3,696,000 | ||
| Gross profit | $6,736,800 | ||
| Expenses: | |||
| Selling expenses | $1,848,000 | ||
| Administrative expenses | 1,120,000 | ||
| Total expenses | 2,968,000 | ||
| Income from operations | $3,768,800 |
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 $924,000 in yearly sales. The expansion will increase fixed costs by $123,200, but will not affect the relationship between sales and variable costs.
Required:
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?
$fill in the blank 9
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.
1.Total Variable cost = 3,696,000*60% + 1,848,000*50% + 1,120,000*30%
= $3,477,600
Total Fixed costs = 3,696,000*40% + 1,848,000*50% + 1,120,000*70%
= $3,186,400
2.Unit variable cost = total variable cost/number of units
= 3,477,600/124,200
= $28
Unit contribution margin = unit selling price – unit variable cost
= $84-$28
= $56
3.Break even sales in units = Total fixed costs/Unit contribution margin
= 3,186,400/56
= 56900 units
4.Under proposed program = (3,186,400+123,200)/56
= 59,100 units
5.Desired income = $3,768,800
Add: Fixed costs = $3309600
Desired contribution margin = $7,078,400
Unit contribution margin = 56
Number of units = 7,078,400/56
= 126400 units
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