Question

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 71,550 units at a price of $69 per unit during the current year. Its income statement for the current year is as follows: Sales $4,936,950 Cost of goods sold 2,438,000 Gross profit $2,498,950 Expenses: Selling expenses $1,219,000 Administrative expenses 1,219,000 Total expenses 2,438,000 Income from operations $60,950 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 $414,000 in yearly sales. The expansion will increase fixed costs by $41,400, but will not affect the relationship between sales and variable costs. Required:

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $60,950 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.
$

Answer 1

SOLUTION

Calculation of fixed expense and variable expense-

	Fixed costs	Variable costs
Cost of goods sold (70%, 30%)	1,706,600	731,400
Selling expense (75%, 25%)	914,250	304,750
Administrative expense (50%, 50%)	609,500	609,500
Total	3,230,350	1,645,650

Unit Variable Cost = Total Variable Costs / Total units sold

= 1,645,650 / 71,550 = $23

Unit Contribution margin = Sale Price per unit - Unit Variable cost

= $69 - $23 = $46

5. Amount of sales (units) = (Desired Income + Total Fixed Cost + Increased Fixed Cost) / Unit Contribution margin

= ($60,950 + $3,230,350 + $41,400) / $46

= $3,332,700  / $46

= 72,450 units

6.

Particulars	Amount ($)
Sales (4,936,950 + 414,000)	5,350,950
Less: Variable cost	(1,645,650)
Contribution margin	3,705,300
Less: Fixed cost ($3,230,350 + $41,400)	3,271,750
Net operating income	433,550