Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 154,100 units ata price of $105 per unit during the current year. Its incomestatement 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 asfollows:
| Variable | Fixed |
| Cost of goods sold | 60% | | 40% | |
| Selling expenses | 50% | | 50% | |
| Administrative expenses | 30% | | 70% | |
Management is considering a plant expansion program for thefollowing year that will permit an increase of $1,260,000 in yearlysales. The expansion will increase fixed costs by $168,000, butwill not affect the relationship between sales and variablecosts.
Required:
1. Determine the total variable costs and thetotal 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 thecurrent year.
units
4. Compute the break-even sales (units) underthe proposed program for the following year.
units
5. Determine the amount of sales (units) thatwould be necessary under the proposed program to realize the$5,855,500 of income from operations that was earned in the currentyear.
units
6. Determine the maximum income from operationspossible with the expanded plant.
$
7. If the proposal is accepted and sales remainat the current level, what will the income or loss from operationsbe for the following year?
$
8. Based on the data given, would you recommendaccepting the proposal?
- In favor of the proposal because of the reduction in break-evenpoint.
- In favor of the proposal because of the possibility ofincreasing income from operations.
- In favor of the proposal because of the increase in break-evenpoint.
- Reject the proposal because if future sales remain at thecurrent level, the income from operations will increase.
- Reject the proposal because the sales necessary to maintain thecurrent income from operations would be below the current yearsales.
Choose the correct answer.
