Question

Multiple-Product Break-even, Break-Even Sales Revenue

Cherry Blossom Products Inc. produces and sells yoga-training products: how-to DVDs and a basic equipment set (blocks, strap, and small pillows). Last year, Cherry Blossom Products sold 13,500 DVDs and 4,500 equipment sets. Information on the two products is as follows:

	DVDs	Equipment Sets
Price	$8	$25
Variable cost per unit	4	15

Total fixed cost is $99,750.

Suppose that in the coming year, the company plans to produce an extra-thick yoga mat for sale to health clubs. The company estimates that 9,000 mats can be sold at a price of $19 and a variable cost per unit of $11. Total fixed cost must be increased by $33,250 (making total fixed cost $133,000). Assume that anticipated sales of the other products, as well as their prices and variable costs, remain the same.

X

Part 1: Sales Mix Instructions and Part 2: Break-Even

REQUIRED:

1. What is the sales mix of DVDs, equipment sets, and yoga mats?
3:1:2 ?

2. Compute the break-even quantity of each product.

Break-even DVDs	units
Break-even equipment sets	units
Break-even yoga mats	units

3a. Prepare an income statement for Cherry Blossom Products for the coming year.

Cherry Blossom Products Inc.
Income Statement
For the Coming Year
	$
	$
	$

3b. What is the overall contribution margin ratio? Use the contribution margin ratio to compute overall break-even sales revenue. (Note: Round the contribution margin ratio to the nearest whole percent; round the break-even sales revenue to the nearest dollar.)

Overall contribution margin ratio		%
Overall break-even sales revenue	$

4. Compute the margin of safety for the coming year in sales dollars.
$

Answer 1

Part 1
	Total of cherry's products =13,500+4,500+9,000 =27,000
	Sales Mix for DVDs =13,500/27,000 =1/2 or 3/6
	Sales Mix for Equipment Sets =4,500/27,000 =1/6
	Sales Mix for DVDs =9,000/27,000 =1/3 or 2/6
	So the Sales Mix ratio is 3:1:2
Part 2		DVDs	Equipment Sets	Yoga Mats
	Sales Price per unit	$                          8	$                             25	$                          19
	Variable cost per unit	$                          4	$                             15	$                          11
	Contribution margin per unit	$                          4	$                             10	$                            8
	Fixed Cost allocated in ratio of 3:1:2	$                 66,500	$                      22,167	$                   44,333
	Break-even units(Fixed Cost/Contribution margin per unit)	16625	2217	5542
Part 3.a	Cherry Blossoms Products Inc.
	Income Statement
	For the Coming Year
		DVDs	Equipment Sets	Yoga Mats	Total
	Sales	$              1,08,000	$                   1,12,500	$                1,71,000	$        3,91,500
	Variable costs	$                 54,000	$                      67,500	$                   99,000	$        2,20,500
	Contribution margin	$                 54,000	$                      45,000	$                   72,000	$        1,71,000
	Fixed Costs	$                 66,500	$                      22,167	$                   44,333	$        1,33,000
	Net Income	$                -12,500	$                      22,833	$                   27,667	$           38,000
Part 3.a	Overall Contribution margin ratio =$171,000 / $391,500 =44%
	Break-even sales Revenue =$133,000 / 44% =$302,273
	(Fixed Cost/Contribution margin ratio)
Part 4	Margin of Safety =$391,500 - $302,273 =$89,228