Question

Lindstrom Company produces two fountain pen models. Information about its products follows: Sales revenue Less: Variable costs Contribution margin Total units sold Product A $ 165,000 72,600 $ 92,400 5,000 Product B $215,000 60,200 $154,800 5,000 Lindstrom’s fixed costs total $87,500. Required: 1. Determine Lindstrom's weighted-average unit contribution margin and weighted-average contribution margin ratio. 2. Calculate Lindstrom's break-even point in units and in sales revenue. 3. Calculate the number of units that Lindstrom must sell to earn a $130,000 profit. 4. Calculate Lindstrom's margin of safety and margin of safety as a percentage of sales if it sells 7,500 total pens.

Answer 1

1	Weighted-average contribution margin:
		Contribution margin	Total units sold	Contribution margin per unit	Weight (Based on units sold)	Weighted-average contribution margin
		a	b	c=a/b	d	e=c*d
	Product A	92400	5000	18.48	0.5	9.24
	Product B	154800	5000	30.96	0.5	15.48
			10000			24.72
	Weighted-average contribution margin=$ 24.72
	Weighted-average contribution margin ratio:
		Contribution margin	Sales revenue	CM Ratio	Weight (Based on units sold)	Weighted-average contribution margin ratio
		a	b	c=a/b	d	e=c*d
	Product A	92400	165000	0.56	0.5	0.28
	Product B	154800	215000	0.72	0.5	0.36
						0.64
	Weighted-average contribution margin ratio=0.64=64%
2	Break-even point in units=Fixed cost/Weighted-average CM=87500/24.72=3539.644=3540
	Break-even point in sales revenue=Fixed cost/Weighted-average CM ratio=87500/64%=$ 136718.8
3	Units to be sold=(Fixed cost+Desired profit)/Weighted-average CM=(87500+130000)/24.72=8798.544=8799
4	Margin of safety in units=Actual sales-Break-even sales=7500-3540=3960
	Margin of safety as percentage of sales=(Actual Sales-Break-even sales)/Actual sales=(7500-3540)/7500=3960/7500=0.528=52.8%