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:

Fixed expenses total $448,900 per year.

	Hawaiian Fantasy		Tahitian Joy
Selling price per unit	$	12	$	100
Variable expense per unit	$	6	$	25
Number of units sold annually		20,000		5,100

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 15,000 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

Contribution format Income Statement
	Hawaiian Fantasy		Tahitian Joy		Total
	Amount	%	Amount	%	Amount	%
Sales	240000	100.00%	510000	100.00%	750000	100.00%
Variable Expenses	120000	50.00%	127500	25.00%	247500	33.00%
Contribution Margin	120000	50.00%	382500	75.00%	502500	67.00%
Fixed Expenses					448900	59.85%
Net Operating Income					40000	5.33%

Break even point in dollar sales = Fixed costs/Contribution margin ratio
=448900/67%
i.e.	670000

Margin of safety = Sales - Break even Sales	80,000
in % = Margin of Safety in Dollars/Sales	10.67%

Contribution format Income Statement
	Hawaiian Fantasy		Tahitian Joy		Samaon Delight		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales	240000	100.00%	510000	100.00%	750000	100.00%	1500000	100.00%
Variable Expenses	120000	50.00%	127500	25.00%	600000	80.00%	847500	56.50%
Contribution Margin	120000	50.00%	382500	75.00%	150000	20.00%	652500	43.50%
Fixed Expenses							448900	29.93%
Net Operating Income							203600	13.57%

Break even point	1031954.02
Margin of safety	468045.977
in %	31.20%

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Answer 2

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