Question

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	$	16		$	120
Variable expense per unit	$	8		$	42
Number of units sold annually		24,000			6,400

Fixed expenses total $580,500 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 $40 each and that has variable expenses of $32 per unit. If the company can sell 11,200 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.

Complete this question by entering your answers in the tabs below.

• Req 1A
• Req 1B
• Req 2A
• Req 2B

Assuming the sales mix given in the question information, do the following: Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

	Island Novelties, Inc., Contribution Income Statement Hawaiian Fantasy Tahitian Joy Total Amount % Amount % Amount % % % % % % % $0 0 % $0 0 % 0 0 % $0

Answer 1

Contribution format Income Statement
	Hawaiian Fantasy		Tahatian Joy		Total
	Amount	%	Amount	%	Amount	%
Sales	384000	100.00%	768000	100.00%	1152000	100.00%
Variable Expenses	192000	50.00%	268800	35.00%	460800	40.00%
Contribution Margin	192000	50.00%	499200	65.00%	691200	60.00%
Fixed Expenses					580500	50.39%
Net Operating Income					110700	9.61%
Break even point in dollar sales = Fixed costs/Contribution margin ratio
967,500.00
i.e.	$967,500
Margin of safety = Sales - Break even Sales	184,500
in % = Margin of Safety in Dollars/Sales	16.02%
Contribution format Income Statement
	Hawaiian Fantasy		Tahatian Joy		Samaon Delight		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales	384000	100.00%	768000	100.00%	448000	100.00%	1600000	100.00%
Variable Expenses	192000	50.00%	268800	35.00%	358400	80.00%	819200	51.20%
Contribution Margin	192000	50.00%	499200	65.00%	89600	20.00%	780800	48.80%
Fixed Expenses							580500	36.28%
Net Operating Income							200300	12.52%
Break even point	1,189,549.18
Margin of safety	410,450.82
in %	25.65%