Question

Problem 6-27 Sales Mix; Break-Even Analysis; Margin of Safety [LO6-7, LO6-9]

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	$	30		$	100
Variable expense per unit	$	21		$	25
Number of units sold annually		30,000			6,000

Fixed expenses total $652,800 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 sells for $30 each and that has variable expenses of $18 per unit. If the company can sell 12,500 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.

Answer 1

Req 1A
		30000		6,000
			Island Novelties Inc
			Contribution income statement
		Hawaiian Fantasy		Tahitian joy		Total
		Amount	%	Amount	%	Amount	%
Sales		900000	100%	600000	100%	1500000	100%
Variable expenses		630000	70%	150000	25%	780000	52%
Contribution margin		270000	30%	450000	75%	720000	48%
Fixed expenses						652,800
Net operating income						67,200
Req 1B
Break even point in dollar sales				1360000
margin of safety in dollars				140000
margin of safety percentage				9.3%
Break even point in dollar sales = fixed expense/contribution margin ratio
			652800/48
			1360000
margin of safety             = actual sales - break even sales
		1,500,000-1,360,000
		140000
Margin of safety percentage = margin of safety/actual sales
		140,000/1,500,000
		9.3%
Required 2A
			Island Novelties Inc
			Contribution income statement
		Hawaiian Fantasy		Tahitian joy		Samoan		total
		Amount	%	Amount	%	Amount	%	amount	%
Sales		900000	100%	600000	100.0%	375000	100%	1875000	100.0%
Variable expenses		630000	70%	150000	25.0%	225000	60%	1005000	53.6%
Contribution margin		270000	30%	450000	75.0%	150000	40%	870000	46.4%
Fixed expenses								652,800
Net operating income								217,200
Req 2b
Break even point in dollar sales				1406897
margin of safety in dollars				468103
margin of safety percentage				25.0%
Break even point in dollar sales = fixed expense/contribution margin ratio
			652800/46.4%
			1406897
margin of safety             = actual sales - break even sales
		1,875,000-1,406,897
		468103
Margin of safety percentage = margin of safety/actual sales
		468,103/1,875,000
		25.0%