Question

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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	$	20		$	100
Variable expense per unit	$	13		$	30
Number of units sold annually		34,000			7,200

Fixed expenses total $651,900 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 $30 per unit. If the company can sell 12,000 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.

Answer 1

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Statementshowing Computations	Hawaiian Fantasy		Tahitian Joy		Total
Paticulars	Amount	%	Amount	%	Amount	%
Sales	680,000.00	100.00%	720,000.00	100.00%	1,400,000.00	100.00%
Less Variable Expenses	442,000.00	65.00%	216,000.00	30.00%	658,000.00	47.00%
Contribution Margin	238,000.00	35.00%	504,000.00	70.00%	742,000.00	53.00%
Fixed cost		0.00%		0.00%	651,900.00	46.56%
Net operating income		0.00%		0.00%	90,100.00	6.44%
Contribution Margin Ratio					53.00%
BEP in Sales $ = 651,900/53%					1,230,000.00
MOS in $ = 1400,000 - 1230,000	170,000.00
MOS in % = (170,000)/1400,000	12.14%
2)
Statementshowing Computations	Hawaiian Fantasy		Tahitian Joy		Samoan Delight		Total
Paticulars	Amount	%	Amount	%	Amount	%	Amount	%
Sales	680,000.00	100.00%	720,000.00	100.00%	600,000.00	100.00%	2,000,000.00	100.00%
Less Variable Expenses	442,000.00	65.00%	216,000.00	30.00%	360,000.00	60.00%	1,018,000.00	50.90%
Contribution Margin	238,000.00	35.00%	504,000.00	70.00%	240,000.00	40.00%	982,000.00	49.10%
Fixed cost							651,900.00	32.60%
Net operating income							330,100.00	16.51%
Contribution Margin Ratio							49.10%
BEP in Sales $ = 651,900/53%							1,327,698.57
MOS in $ = 2000,000-1327,698.57	672,301.43
MOS in % = 672,301.43/2000,000	33.62%