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: Hawaiian Fantasy Tahitian Joy Selling price per unit Variable expense per unit Number of units sold annually 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 sels 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 fixed expenses: a. Prepare a revised contribution format income statement that includes Samoan Deight. 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

	Product - H	Product - T
SP (A)	$            25	$                 120
Variable exp (B)	$            15	$                    42
Contribution pu (S-V) (C )	$            10	$                    78
No of Units sold Annually (D)	14000	7500
Fixed Expense	$ 5,80,000
Req 1A
Contribution Income Statement
	Product - H		Product - T		Total
	Amount	% (Product /Total)	Amount	% (Product /Total)	Amount	%
Sales (E=D*A)	$ 3,50,000	28%	$                    9,00,000	72%	$ 12,50,000	100%
Varibale Expenses (F =D*B)	$ 2,10,000	40%	$                    3,15,000	60%	$   5,25,000	42%	Varible Cost/Sales
Contribution Margin (G =E-F)	$ 1,40,000	19%	$                    5,85,000	81%	$   7,25,000	58%	Contribution/Sales
Fixed Expense (H)					$   5,80,000	46%	FA/Sales
Net Operating Income (I=G-F)					$   1,45,000	12%	NOI/Sales
Req 1B
Calculation of BEP Point
BEP point where your contribution = FA
Particulars		Amount	Remarks
Contribution Margin		58%	(As calculated above)
Fixed Cost		$         5,80,000	given
BEP in $ sales		$       10,00,000	Fixed Cost/Contribution Margin
Sales		$       12,50,000	(As calculated above)
MOS in $		$         2,50,000	Sales- BEP
MOS in %		20%	MOS in $ /Sales
Req 2A
Revised Contribution Income Statement
	Product - H		Product - T		Product - S		Total
	Amount	% (Product /Total)	Amount	% (Product /Total)	Amount	% (Product /Total)	Amount	%
Sales	$ 3,50,000	18%	$                    9,00,000	47%	$   6,50,000	34%	$             19,00,000	100%
Varibale Expenses	$ 2,10,000	20%	$                    3,15,000	30%	$   5,20,000	50%	$             10,45,000	55%	Varible Cost/Sales
Contribution Margin	$ 1,40,000	16%	$                    5,85,000	68%	$   1,30,000	15%	$               8,55,000	45%	Contribution/Sales
Fixed Expense							$               5,80,000	31%	FA/Sales
Net Operating Income							$               2,75,000	14%	NOI/Sales
Req 2B
Calculation of Revised BEP Point and MOS
BEP point where your contribution = FA
Particulars		Amount	Remarks
Contribution Margin		45%	(As calculated above)
Fixed Cost		$         5,80,000	given
BEP in $ sales		$ 12,88,888.89	Fixed Cost/Contribution Margin
Sales		$       19,00,000	(As calculated above)
MOS in $		$         6,11,111	Sales- BEP
MOS in %		32%	MOS in $ /Sales