Question

Vernon Company produces two products. Budgeted annual income statements for the two products are provided as follows. Power Lite Total Budgeted Per Budgeted Budgeted Per Budgeted Budgeted Budgeted Number Unit Amount Number Unit Amount Number Amount Sales 270 @ $ 690 = $ 186,300 630 @ $ 580 = $ 365,400 900 $ 551,700 Variable cost 270 @ 420 = (113,400) 630 @ 350 = (220,500) 900 (333,900) Contribution margin 270 @ 270 = 72,900 630 @ 230 = 144,900 900 217,800 Fixed cost (12,000) (133,200) (145, 200) Net income $ 60,900 $ 11,700 $ 72,600 Required: a. Based on budgeted sales, determine the relative sales mix between the two products. b. Determine the weighted average contribution margin per unit. c. Calculate the break-even point in total number of units. d. Determine the number of units of each product Vernon must sell to break even. e. Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products. f. Determine the margin of safety based on the combined sales of the two products.

Answer 1

a. Sales mix
Power = 270/900 = 30%
Lite = 630/900 = 70%

b.
Weighted average contribution margin per unit = $270 x 30% + $230 x 70% = $242 per unit

c.
Break even point = Fixed Costs / Weighted average contribution margin per unit
= $145200/242 = 600 units

d.
Break even units
Power = 600 x 30% = 180 units
Lite = 600 x 70% = 420 units

e.

	Power			Lite			Total
	Budgeted Number	Per Unit	Budgeted Amount	Budgeted Number	Per Unit	Budgeted Amount	Budgeted Number	Budgeted Amount
Sales	180	$                690	$         124,200	420	$                    580	$        243,600	600	$   367,800
Variable Cost	180	$                420	$         -75,600	420	$                    350	$      -147,000	600	$ -222,600
Contribution Margin	180	$                270	$           48,600	420	$                    230	$          96,600	600	$   145,200
Fixed Cost			$         -12,000			$      -133,200		$ -145,200
Net Income			$           36,600			$        -36,600		$               -

f. Margin of Safety = Actual Sales - Break even sales
= $551700-367800 = $183900