Determine the amount of sales (units) that would be necessary under Break-Even S
ID: 2432175 • Letter: D
Question
Determine the amount of sales (units) that would be necessary under
Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 108,000 units at a price of $84 per unit during the current year. Its income statement for the current year is as follows:
The division of costs between fixed and variable is as follows:
Management is considering a plant expansion program that will permit an increase of $756,000 in yearly sales. The expansion will increase fixed costs by $75,600, 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. Enter the final answers rounded to the nearest dollar.
2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year. Enter the final answers rounded to two decimal places.
3. Compute the break-even sales (units) for the current year. Enter the final answers rounded to the nearest whole number.
units
4. Compute the break-even sales (units) under the proposed program for the following year. Enter the final answers rounded to the nearest whole number.
units
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $112,000 of income from operations that was earned in the current year. Enter the final answers rounded to the nearest whole number.
units
6. Determine the maximum income from operations possible with the expanded plant. Enter the final answer rounded to the nearest dollar.
$
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? Enter the final answer rounded to the nearest dollar.
$
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.
Explanation / Answer
(1)
Variable Cost
Fixed Cost
COGS
(4480000 * 70%)
=3136000
(4480000 * 30%)
=1344000
Selling Exp
(2240000 * 75%)
=1680000
(2240000 * 25%)
=560000
Admn Exp
(2240000 * 50%)
=1120000
(2240000 * 50%)
=1120000
Total
5936000
3024000
(2)
Total
Per Unit
Sales
9072000
84
(-) Variable cost
5936000
(5936000/108000)
=54.96
Contribution
3136000
29.04
(3) BEP(in units):-
Fixed cost/Contribution pu
3024000/29.04 = 104132 units
(4) BEP(in units) – Under Proposed Programme
Fixed cost/Contribution pu
Revised FC = 3024000 + 75600 = 3099600
Relationship between sales & VC will remain same. Hence Contribution pu remain same
3099600/29.04 = 106736 units
(5) Let X be the units sold
Target Profit = 112000
Units sold * (SP – VC) – FC = Profit
X * (84 – 54.96) – 3099600 = 112000
29.04X = 3211600
X = 110592 units
(6) Maximum Income from Operations possible with expanded plant
Revised Unit Sold (9828000/84)
117000
Revised Contribution (117000 * 29.04)
3397680
(-) Revised FC (3024000 + 75600)
3099600
Profit
298080
Variable Cost
Fixed Cost
COGS
(4480000 * 70%)
=3136000
(4480000 * 30%)
=1344000
Selling Exp
(2240000 * 75%)
=1680000
(2240000 * 25%)
=560000
Admn Exp
(2240000 * 50%)
=1120000
(2240000 * 50%)
=1120000
Total
5936000
3024000
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