Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 129,600 units at a price of $63 per unit during the current year. Its income statement is as follows:
Sales |
|
|
$8,164,800 |
Cost of goods sold |
|
|
2,898,000 |
Gross profit |
|
|
$5,266,800 |
Expenses: |
|
|
|
Selling expenses |
$1,449,000 |
|
|
Administrative expenses |
861,000 |
|
|
Total expenses |
|
|
2,310,000 |
Income from operations |
|
|
$2,956,800 |
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 $630,000 in yearly sales. The expansion will increase fixed costs by $84,000, 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.
Total variable costs |
$fill in the blank 1 |
Total fixed costs |
$fill in the blank 2 |
2.Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
Unit variable cost |
$fill in the blank 3 |
Unit contribution margin |
$fill in the blank 4 |
3.Compute the break-even sales (units) for the current year.
fill in the blank 5 units
4.Compute the break-even sales (units) under the proposed program for the following year.
fill in the blank 6 units
5.Determine the amount of sales (units) that would be necessary under the proposed program to realize the $2,956,800 of income from operations that was earned in the current year.
fill in the blank 7 units
6.Determine the maximum income from operations possible with the expanded plant.
$fill in the blank 8
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.