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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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.

1.

To determine

Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit

To determine: the total fixed costs and the total variable costs for the current year.

Explanation

Determine the total variable cost.

Particulars Total cost (A) Variable cost percentage (B) Variable cost (A×B)
Cost of Goods sold $25,000,000 70% $17,500,000
Selling expenses $4,000,000 75% $3,000,000
Administrative expenses $3,000,000 50% $1,500,000
Total variable cost $22,000,000

Table (1)

Determine the total fixed cost...

2.

(a)

To determine
the unit variable cost for the current year.

(b)

To determine
the unit contribution margin for the current year.

3.

To determine

To compute: the break-even sales (units) for the current year.

4.

To determine

To compute: the break-even sales (units) under the proposed program for the following year.

5.

To determine
the amount of sales (units) if the company desires a target profit of $15,000,000.

6.

To determine
the maximum income from operations possible with the expanded plant.

7.

To determine
the income or loss from operations for the following year if the proposal is accepted and the sales remains same.

8.

To determine

To explain: whether to recommend for accepting the proposal.

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