Question

Assume that Ocean King Products sells three varieties of canned seafood with the following prices and costs.

	Selling Price per Case			Variable Cost per Case			Fixed Cost per Month
Variety 1	$	10		$	8			–
Variety 2		8			6			–
Variety 3		13			9			–
Entire firm		–			–		$	46,800

The sales mix (in cases) is 40 percent Variety 1, 35 percent Variety 2, and 25 percent Variety 3.

Required:

a. At what sales revenue per month does the company break even?

b. Suppose the company is subject to a 35 percent tax rate on income. At what sales revenue per month will the company earn $43,485 after taxes assuming the same sales mix?

Answer 1

Ans:

Ocean King Products:

Products	Selling price per case $	Variable cost per case $	Contribution margin per case $
Variety 1	10	8	2
Variety 2	8	6	2
Variety 3	13	9	4

Sales mix: variety 1 = 40%, variety 2 = 35%, variety 3 = 25%

Let total sales be x

Contribution margin:

Variety 1 = 2 * x * 40% = $ 0.8x

Variety 2 = 2 * x * 35% = $ 0.7x

Variety 3 = 4 * x * 25% = $ 1x

Total contribution margin = $ 2.5x

Break even sales units = Fixed cost / contribution margin

= $46,800/2.5x

x = 18,720

Break even sales revenue: (Units sold * Sales mix * Selling price)

Variety 1 = 18,720 * 40% * $10 = $74,880

Variety 2 = 18,720 * 35% * $8 = $52,416

Variety 3 = 18,720 * 25% * $13 = $60,840

a. Total break even sales revenue = $188,136

b. Profit before taxes = $43,485 / 65%

Profit before taxes = $66,900

Required sales = (Required profit + Fixed cost) / Contribution margin

= ($66,900 + $46,800) / 2.5x

x = $113,700/2.5

x = 45,480 units to be sold for profit of $43,485 after taxes

Sales revenue before taxes:

Variety 1 = 45,480 * $10 * 40% = $181,920

Variety 2 = 45,480 * $8 * 35% = $127,344

Variety 3 = 45,480 * $13 * 25% = $147,810

Total sales revenue= $457,074 to earn profit of $43,485 after taxes

b. Total sales revenue =$457,074

a.	Break even sales revenue	$188,136
b.	Sales revenue to earn $43,485 after taxes	$457,074

If any doubts or queries please comment and clarify I'll explain ASAP.