question archive 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 102,600 units at a price of $132 per unit during the current year
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 102,600 units at a price of $132 per unit during the current year
Subject:AccountingPrice:4.87 Bought7
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 102,600 units at a price of $132 per unit during the current year. Its income statement for the current year is as follows:
Sales $13,543,200Cost of goods sold 6,688,000Gross profit $6,855,200Expenses: Selling expenses$3,344,000 Administrative expenses3,344,000 Total expenses 6,688,000Income from operations $167,200
The division of costs between fixed and variable is as follows:
VariableFixedCost of goods sold70% 30% Selling expenses75% 25% Administrative expenses50% 50%
Management is considering a plant expansion program that will permit an increase of $1,056,000 in yearly sales. The expansion will increase fixed costs by $105,600, but will not affect the relationship between sales and variable costs.
Required:
1. Determine the total variable costs and the total fixed costs for the current year. Enter the final answers rounded to the nearest dollar.
Total variable costs$Total fixed costs$
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.
Unit variable cost$Unit contribution margin$
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 $167,200 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.
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Answer:
5). The amount of sales (units) that would be necessary under the proposed program=104,913
Step-by-step explanation
1). Under Present Conditions:
Total variable cost:
Cost of goods sold=70% x $6,688,000=$4,681,600
Selling expenses=75% x $3,344,000=$2,508,000
Administrative expenses= 50% x $3,344,000=$1,672,000
Total variable cost=$4,681,600 + $2,508,000 + $1,672,000
Total variable cost=$8,861,600
Total Fixed cost:
Cost of goods sold=30% x $6,688,000=$2,006,400
Selling expenses=25% x $3,344,000=$836,000
Administrative expenses= 50% x $3,344,000=$1,672,000
Total Fixed cost=$2,006,400 + $836,000 + $1,672,000
Total Fixed cost=$4,514,400
2).
(a) The unit variable cost
The unit variable cost=Total variable cost/Total number of units
The unit variable cost=$8,861,600/102,600
The unit variable cost=$86.37
(b) The unit contribution margin
The unit contribution margin=Selling Price per unit-Unit variable cost
The unit contribution margin= $132-$86.37
The unit contribution margin= $45.63
3). The break-even sales (units) for the current year
Break-even sales (units)=Total Fixed costs/Unit contribution margin
Break-even sales (units)=$4,514,400/ $45.63
Break-even sales (units)=98,935
4). The break-even sales (units) for the proposed program
Break-even sales (units)=Total Fixed costs/Unit contribution margin
Total Fixed costs=$4,514,400 + $105,600=$4,620,000
Unit contribution margin does not change
Break-even sales (units)=$4,620,000/ $45.63
Break-even sales (units)=101,249
5). The amount of sales (units) that would be necessary under the proposed program to realize the $167,200
Income from operations=(Selling price -Unit variable cost) x Units -Total Fixed costs
Or
Income from operations=Unit contribution margin x Units -Total Fixed costs
- Selling price =$132;
- Unit contribution margin=$45.63;
- Income from operations= $167,200
- Unit variable cost=$86.37 and
- Total Fixed costs=$4,620,000
The unknown value is the number of Units, thus, using any of the above equations,
$167,200=$45.63 x Units-$4,620,000
$167,200 +$4,620,000=$45.63 x Units (When the fixed cost cross the equal sign to the other it will be added since on this side is being deduct)
$4,787,200=$45.63 x Units
Therefore,
The amount of sales (units)=$4,787,200/$45.63
The amount of sales (units)=104,913
