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:
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 |
The division of costs between variable and fixed 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 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.
Instructions
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.
4. Compute the break-even sales (units) under the proposed program for
the following year.
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.
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? Explain.