Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product’s selling price,...

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Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product’s selling price,...

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product’s selling price, variable expense per unit, and annual sales volume are as follows:

	Hawaiian Fantasy		Tahitian Joy
Selling price per unit	$	30	$	125
Variable expense per unit	$	21	$	25
Number of units sold annually		10,000		5,600

Fixed expenses total $565,500 per year.

Required:

1. Assuming the sales mix given above, do the following:

a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.

2. The company has developed a new product called Samoan Delight that sells for $50 each and that has variable expenses of $35 per unit. If the company can sell 20,000 units of Samoan Delight without incurring any additional fixed expenses:

a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.

b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.

business accounting

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Answer 1

Answer #1

1.

a.

	Hawaiian Fantasy		Tahitan joy		Total
		10000 units		5600 units
Sales	30	300000	125	700000	1000000
Less: Variable cost	21	210000	25	140000	350000
Contribution	9	90000	100	560000	650000
% contribution of sales		30%		80%	65%
Less : Fixed costs					565500
Margin		90000		560000	84500

b.

Break Even Sales: Fixed cost/Contribution margin => 565500/0.65 => 870000.

Margin of Safety: 1000000-870000 = 130,000. So, 130000/1000000*100 = 13%.

2.

a.

	Hawaiian Fantasy		Tahitan joy		Samoan Delight		Total
		10000 units		5600 units		20000 units
Sales	30	300000	125	700000	50	1000000	2000000
Less: Variable cost	21	210000	25	140000	35	700000	1050000
Contribution	9	90000	100	560000	15	300000	950000
% contribution of sales		30%		80%		30%	47.5%
Less : Fixed costs							565500
Margin		90000		560000		300000	384500

b.

Break Even Sales: Fixed cost/Contribution margin => 565500/0.475 => 1190526.

Margin of Safety: 2000000-1190526 = 809474. So, 40.44%

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Answer 2

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