Question

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings. Type of Sales Price Variable Cost Bookshelf per Unit per Unit Basic $1.75 $5.00 9.00 Deluxe 8.10 The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called "Combined," the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $344,190. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table. Type of Bookshelf Percent of Break-Even Sales Break-Even Sales Sales Mix in Units in Dollars Basic Deluxe Target Profit Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales. 1. If Cover-to-Cover Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be? 2. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be? $ 3. What would explain the difference between your answers for (1) and (2)? a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income b. Cover-to-Cover Company's contribution margin ratio is lower, meaning that it's more efficient in its operations. c. The companies have goals that are not in the relevant range. d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

Answer 1

1. Computation of the given table

Type of Book Shelf	Sales Per Unit	V C Per Unit	Contribution Per Unit	Percent of Sales Mix	Break-Even Sales in units	Break-Even Sales in Dollar
Basic	$5.00	$1.75	$3.25	60%	89,400 (149,000X60%)	$290,550 (89,400X$3.25)
Deluxe	$9.00	$8.10	$0.90	40%	59,600 (149,000X40%)	$53,640 (59,600X$0.90)
Total				100.00	149,000	$344,190

Workings:

a. In the given problem, the units are not given. So first we calculate the Break Even units using the combined Contribution Margin

BEP Sales = Total Fixed Cost / Combined COntribution Margin = $344,190 / $2.31 = 149000 Units

b. Total Break Even Sales in Dollars = Total Fixed Costs = $344,190

c. Let us calculate the weighted contribution margin at various percentages to compute the sales percent Mix

Type of book Shelf	Sales price Per Unit	Variable Cost Per Unit	Contribution Per Unit	Percent of Sales Mix	Weighted Contribution margin	Percent of Sales Mix	Weighted Contribution margin
	(1)	(2)	(3)	(4)	(5) = (4X3)	(6)	(7) = (6X3)
Basic	5	1.75	3.25	50%	1.625	60%	1.95
Deluxe	9	8.1	0.9	50%	0.45	40%	0.36
Total			4.15	100%	2.075	100%	2.31

From the above table, it can be observed that at 60% and 40% the combined contribution margin is $2.31 per unit. Therefore the sales percentage is 60% for Basic Type and 40% for Deluxe Type.

2. If Cover-to-Cover Company Wants to increase its profit by $20,000 in the coming year, waht must their amount of sales be ?

In the problem given, it is given that the both companies have same net sales and net income. Therefore the number of units to be sold to earn the target profit would be the same for both the companies.

The income Statement is not given in the Question Posted here. Therefore, I'm assuming the target profit is $20,000.

Target profit = $20,000

Sales in Units = (Total Fixed Cost + target Profit ) / Combined Contribution Margin

= ($344,190 + $20,000 ) / $2.31

= $364,190 / $2.31

= 157,658 Units

Sales In Dollars:

Type of book Shelf	Sales price Per Unit	Percent of Sales Mix	Sales in Units	Sales in Dollars
(1)	(2)	(3)	(4)	(5) = (4X3)
Basic	$5.00	60%	94594.8	$472,974
Deluxe	$9.00	40%	63063.2	$567,569
Total		100%	157658	$1,040,543

3. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, waht must their amount of sales be ?

In the problem given, it is given that the both companies have same net sales and net income. Therefore the number of units to be sold to earn the target profit would be the same for both the companies.

The income Statement is not given in the Question Posted here. Therefore, I'm assuming the target profit is $20,000.

Target profit = $20,000

Sales in Units = (Total Fixed Cost + target Profit ) / Combined Contribution Margin

= ($344,190 + $20,000 ) / $2.31

= $364,190 / $2.31

= 157,658 Units

Sales In Dollars:

Type of book Shelf	Sales price Per Unit	Percent of Sales Mix	Sales in Units	Sales in Dollars
(1)	(2)	(3)	(4)	(5) = (4X3)
Basic	$5.00	60%	94594.8	$472,974
Deluxe	$9.00	40%	63063.2	$567,569
Total		100%	157658	$1,040,543

4. What would explain the difference between the answer for (1) & (2)\

Ans: d. The answers are not different, each company has the same required sales amount for the coming year to achieve the desired target profit.