3.Determine the amount of sales (units) that would be necessary under Break-Even
ID: 2438096 • Letter: 3
Question
3.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 78,300 units at a price of $129 per unit during the current year. Its income statement for the current year is as follows:
Sales $10,100,700
Cost of goods sold 4,988,000
Gross profit $5,112,700
Expenses:
Selling expenses $2,494,000
Administrative expenses 2,494,000
Total expenses 4,988,000
Income from operations $124,700
The division of costs between fixed and variable is as follows:
Variable Fixed
Cost of goods sold 70% 30%
Selling expenses 75% 25%
Administrative expenses 50% 50%
Management is considering a plant expansion program that will permit an increase of $903,000 in yearly sales. The expansion will increase fixed costs by $90,300, 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 $124,700 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.
$ Income
8. Based on the data given, would you recommend accepting the proposal?
a.In favor of the proposal because of the reduction in break-even point.
b.In favor of the proposal because of the possibility of increasing income from operations.
c.In favor of the proposal because of the increase in break-even point.
d.Reject the proposal because if future sales remain at the current level, the income from operations will increase.
e.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
4.
5.
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Explanation / Answer
1.
Total variable costs
$6983200
Total fixed costs
$2992800
Variable
Fixed
Total $
%
$
%
$
Cost of goods sold
4,988,000
70%
3491600
30%
1496400
Selling expenses
2,494,000
75%
124700
25%
623500
Administrative expenses
2,494,000
50%
124700
50%
124700
Total costs $
9976000
3641000
2244600
2.
Unit variable cost
$89.185
Unit contribution
$44.592
Sales $
10100700
Less: Variable costs
6983200
Contribution $
3491600
No. of units
78300
Per unit variable cost $
88.3333
($6916500/78300)
Per unit contribution $
46.6667
($3491600/78300)
3. Break-even sales (units): =50336.38 units
Break-even sales (units) = Total fixed costs / Contribution margin per unit = $2244600/$44.592 = 50336.38
4. Break-even sales (units): 98551 units
Break-even sales (units) = Total fixed costs / Contribution margin per unit
Total fixed costs + $3491600 + $903000 = $4394600
Break-even sales (units) = $4394600/$44.592 = 98551.309 units
Note: Per Chegg guidelines, 4 sub-parts have been answered
Total variable costs
$6983200
Total fixed costs
$2992800
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