Reference no: EM132657205

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 109,350 units at a price of $45 per unit during the current year. Its income statement for the current year is as follows:

Sales $4,920,750

Cost of goods sold 2,430,000

Gross profit $2,490,750

Expenses: Selling expenses$1,215,000

Administrative expenses1,215,000

Total expenses 2,430,000

Income from operations $60,750

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 $450,000 in yearly sales. The expansion will increase fixed costs by $45,000, but will not affect the relationship between sales and variable costs.

Problem 1: 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? Enter the final answer rounded to the nearest dollar.

Problem 2: Based on the data given, would you recommend accepting the proposal? (Have to choose one of the following)

Option 1: In favor of the proposal because of the reduction in break-even point.

Option 2: In favor of the proposal because of the possibility of increasing income from operations.

Option 3: In favor of the proposal because of the increase in break-even point.

Option 4: Reject the proposal because if future sales remain at the current level, the income from operations will increase.

Option 5: Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.