Question
1. Break-Even Sales Under Present and Proposed Conditions Darby Company, operating at full capacity, sold 148,400 units at a price of $93 per unit during
1. Break-Even Sales Under Present and Proposed Conditions
Darby Company, operating at full capacity, sold 148,400 units at a price of $93 per unit during the current year. Its income statement is as follows:
Sales | $13,801,200 | ||
Cost of goods sold | 4,898,000 | ||
Gross profit | $8,903,200 | ||
Expenses: | |||
Selling expenses | $2,449,000 | ||
Administrative expenses | 1,457,000 | ||
Total expenses | 3,906,000 | ||
Income from operations | $4,997,200 |
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 $1,209,000 in yearly sales. The expansion will increase fixed costs by $161,200, 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 | $ |
Total fixed costs | $ |
2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
Unit variable cost | $ |
Unit contribution margin | $ |
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 $4,997,200 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? $
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.
2.
Break-Even Sales and Cost-Volume-Profit Chart
For the coming year, Cleves Company anticipates a unit selling price of $128, a unit variable cost of $64, and fixed costs of $697,600.
Required:
1. Compute the anticipated break-even sales (units). units
2. Compute the sales (units) required to realize a target profit of $262,400. units
3. Construct a cost-volume-profit chart, assuming maximum sales of 21,800 units within the relevant range. From your chart, indicate whether each of the following sales levels would produce a profit, a loss, or break-even.
$1,958,400 | |
$1,740,800 | |
$1,395,200 | |
$1,049,600 | |
$832,000 |
4. Determine the probable income (loss) from operations if sales total 17,400 units. If required, use the minus sign to indicate a loss. $
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