Question

Tennis World manufactures and sells two tennis racquets Gamma and Kennex. The following data are provided:

	Gamma	Kennex
Sales mix in units	60%	40%
Selling price	$310	$360
Variable manufacturing costs	$115	$140

Annual fixed costs of the company are $8,200,000 and the budgeted sales is $15,000,000. The company is subject to a tax rate of 30%.

Required:
(i) Calculate the unit contribution margin for each product type. (1 mark)

(ii) Determine the weighted-average unit contribution margin. (1 mark)

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(iii) Calculate the breakeven volume in units and in sales dollars - in total and for each product. Assume a constant sales mix. (3 marks)

(iv) How many units of each product must be sold to earn a target net profit after tax of $1,435,000? Assume a constant sales mix. (3 marks)

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(v) Determine the company’s safety margin in dollars. (1 mark)

(vi) Provide TWO limitations of cost volume profit analysis method. (2 marks)

Answer 1

I) Calculate Contribution margin unit:
	Units
Particulars	Gamma	Kennex
Selling Price p.u	310	360
Less: Variable cost p.u	115	140
Contribution margin p.u	195	220

II) Weighted average unit contribution margin:
	Units
Particulars	Gamma	Kennex	Total
Contribution margin p.u	195	220
Weighted average	0.6	0.4
Weighted average unit contribution margin	117	88	205

III) Break even volume in units and sales:
				Amount in $
Particulars	Calculation	Units	Selling price	Sales(Break even)
Break even (units)	Fixed cost/ weighted contribution unit	40000
Gamma	60%	24000	310	7,440,000
Kennex	40%	16000	360	5,760,000
IV) Target net profit after tax of $ 1435,000
Profit after tax	1,435,000
Profit before tax	2,050,000
		Units
Sales in units	(Fixed cost+Targeted profit before tax /Weighted contribution margin	50,000
Gamma		30,000
Kennex		20,000