Question

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: Fantasy Tahitian Joy 12e Selling price per unit Variable expense per unit Number of units sold annually 14, eee 7,500 Required Fixed expenses total $580,000 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 $40 per unit. If the company can sell 13.000 units of Samoan Delight without incurring any additional foed 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

Answer 1

1. A. Contribution income statement-

	Hawalian Fantsay	Hawalian Fantsay	Tahitian Joy	Tahitian Joy	Total	Total
	Amount ($)	Percent	Amount ($)	Percent	Amount ($)	Percent
Sales	350,000	100%	900,000	100%	1,250,000	100%
Variable expense	210,000	60%	315,000	35%	525,000	42%
Contribution margin	140,000	40%	585,000	65%	725,000	58%
Fixed expenses					580000
Net operating income					145,000

B. Breakeven point in sales dollar = Fixed expenses / Overall contribution margin ratio

= $ 580,000 / 58% = $1,000,000

Margin of safety (in dollars) = Actual sales - Breakeven sales

= 1,250,000 - 1,000,000 = $250,000

Margin of safety (Percentage) = Margin of safety in dollars / Total sales

= $250,000 / $1,250,000 = 20%

2. A. Contribution income statement-

	Hawalian Fantsay	Hawalian Fantsay	Tahitian Joy	Tahitian Joy	Samoan Delight	Samoan Delight	Total	Total
	Amount ($)	Percent	Amt ($)	Percent	Amt ($)	Percent	Amt($)	Percent
Sales	350,000	100%	900,000	100%	650,000	100%	1,900,000	100%
Variable expense	210,000	60%	315,000	35%	520,000	80%	1,045,000	55%
Contribution margin	140,000	40%	585,000	65%	130,000	20%	855,000	45%
Fixed expenses							580000
Net operating income							275,000

B. Breakeven point in sales dollar = Fixed expenses / Overall contribution margin ratio

= $ 580,000 / 45% = $1,288,889

Margin of safety (in dollars) = Actual sales - Breakeven sales

= 1,900,000 - 1,288,889 = $611,111

Margin of safety (Percentage) = Margin of safety in dollars / Total sales

= $611,111 / $1,900,000 = 32.2%