Answer:
Darby Company
1. Determination of the total variable costs and the total fixed costs for the current year.
Total variable costs $_____22,000,000
Total fixed costs $_____10,000,000
2. Determination of (a) the unit variable cost and (b) the unit contribution margin for the current year.
Unit variable cost $_____44 ($22,000,000/500,000)
Unit contribution margin $_____50 ($94 - $44)
3. Compute the break-even sales (units) for the current year:
Break-even sales (units) = Fixed Costs/Contribution per unit
= $10,000,000/$50 = 200,000 units
4. Compute the break-even sales (units) under the proposed program for the following year.
Break-even sales (units) = Fixed costs/Contribution per unit
= $11,800,000/$50 = 236,000
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 were earned in the current year
Break-even sales (units) to achieve income target = (Fixed costs + Income target)/Contribution per unit
= ($11,800,000 + 15,000,000)/$50
= 536,000
6. Determine the maximum income from operations possible with the expanded plant.
Income Statement for the current year
Next Year's Financials:
Total
Sales $50,760,000 ($94 * 540,000)
Expenses:
Total variable 23,760,000 ($44 * 540,000)
Fixed costs 11,800,000 ($10,000,000 + $1,800,000)
Income from operations $15,200,000
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?
Total
Sales $47,000,000 ($94 * 500,000)
Expenses:
Total variable 22,000,000 ($44 * 500,000)
Fixed costs 11,800,000 ($10,000,000 + $1,800,000)
Income from operations $13,200,000
8. Based on the data given, would you recommend accepting the proposal?
Unless the proposal results to an increase in the units sold, it is not acceptable as can be seen from (7) above. However, it is very acceptable if sales unit will increase by 40,000 units as illustrated in (6) above.
b. In favor of the proposal because of the possibility of increasing income from operations.
Explanation:
a) Data and Calculations:
Income Statement for the current year
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
Sales volume = 500,000 units
Selling price = $94
Division of costs between variable and fixed is as follows:
Variable Fixed Variable Fixed Total
Sales $47,000,000
Cost of goods sold 70% 30% $17,500,00 7,500,000 25,000,000
Gross profit $22,000,000
Expenses:
Selling expenses 75% 25% 3,000,000 1,000,000 4,000,000
Administrative exp. 50% 50% 1,500,000 1,500,000 3,000,000
Total expenses 4,500,000 2,500,000 7,000,000
Total variable and fixed costs 22,000,000 10,000,000 32,000,000
Income from operations $15,000,000
Next Year's Financials:
Variable Fixed Variable Fixed Total
Sales $50,760,000
Cost of goods sold 70% 30% $17,500,00 7,500,000 25,000,000
Gross profit $22,000,000
Expenses:
Total variable and fixed costs 22,000,000 11,800,000
Income from operations $15,000,000
