Break-Even Sales Under Present and Proposed Conditions Darby Company, operating

Question

Break-Even Sales Under Present and Proposed Conditions

Darby Company, operating at full capacity, sold 500,000 units at a price of $94 per unit during the current year. Its income statement is as follows:

The division of costs between variable and fixed is as follows:

Management is considering a plant expansion program for the following year that will permit an increase of $3,760,000 in yearly sales. The expansion will increase fixed costs by $1,800,000 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.

2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.

3. Compute the break-even sales (units) for the current year.
units

4. Compute the break-even sales (units) under the proposed program for the following year.
units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $15,000,000 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?
$ Income

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

Sales $47,000,000 Cost of goods sold 25,000,000 Gross profit $22,000,000 Expenses: Selling expenses $4,000,000 Administrative expenses 3,000,000 Total expenses 7,000,000 Income from operations $15,000,000

Explanation / Answer

Part (1)

($ in millions)

Part 2

(a) Unit Variable Cost (VC) = Total VC/No. of Units

= $22,000,000/5,00,000

= $44

(b) Unit Contribution Unit = Selling Price Per Unit- Unit Variable Cost

= $94-$44

= $50

Part 3

Break Even Sales = Fixed Cost/Contribution Per Unit

= $10,000,000/$50

= 200,000 Units

Part 4

Break Even Sales under the proposed program = Fixed Cost after expansion/ Contribution per unit

= ($10,000,000+$1,800,000)/$50

= 236,000 Units

Note- Since, the expansion will not affect the relationship between sales and variable costs, contribution per unit will remain the same as before.

Particulars Variable Cost Fixed Cost Cost of Goods Sold (COGS) 25*70% = 17.50 25*30% = 7.50 Selling Expenses 4*75% = 3 4*25% = 1 Administrative Expenses 3*50% = 1.50 3*50% = 1.50 Total 22.00 10.00

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.