Question

21 Milano Co. manufactures and sells three products: I, product 2. and product 3. Their unit selling prices are product 1, $40: product 2. S30, and product 3, S20. The per unit variable costs to manufacture and sell these products are product 1 S30; product 2, S15; and product 3.SS Their sales mix is reflected in a ratio of 6:4:2 Annual fixed costs shared by all three products are $270.000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $10 and product 2 by S5. However, the new material requires new equipment, which will increase annual fixed costs by S50,000. Required 1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product. Check (f) Old plan break-even, 1,875 composite units 2 If the company uses the new material, determine its new each individual product. (Round to the next whole unit.) break-even point in both sales units and sales dollars of 2

Answer 1

Answer

• All working forms part of the answer
• Exercise 21 – 78

--Requirement 1

Working		Product 1	Product 2	Product 3
A	Sale price per unit	$                40.00	$                 30.00	$          20.00
B	Variable Cost per unit	$                30.00	$                 15.00	$            8.00
C = A - B	Contribution margin per unit	$                10.00	$                 15.00	$          12.00
D	Sales Mix	0.5	0.333333333	0.16666667
E = C x D	Weighted Contribution margin per unit	$                   5.00	$                    5.00	$            2.00

A	Annual Fixed Cost	$      270,000.00
B = $ (5+5+2)	Total Weighted average contribution margin per unit	$                12.00
C = A/B	Break Even point in Sales unit	22500

Answer

Working		Product 1	Product 2	Product 3
A	Sales Mix	0.5	0.333333333	0.16666667
B = 22500 units x A	Individual Break Even in units - ANSWER	11250	7500	3750
C	Sale price per unit	$                40.00	$                 30.00	$          20.00
D = B x C	Individual Break Even in Sales Dollars – ANSWER	$      450,000.00	$       225,000.00	$ 75,000.00

---Requirement 2

Working		Product 1	Product 2	Product 3
A	Sale price per unit	$            40.00	$                30.00	$               20.00
B	Variable Cost per unit	$            20.00	$                10.00	$                 8.00
C = A - B	Contribution margin per unit	$            20.00	$                20.00	$               12.00
D	Sales Mix	0.5	0.333333333	0.166666667
E = C x D	Weighted Contribution margin per unit	$            10.00	$                  6.67	$                 2.00

A	Annual Fixed Cost	$ 270,000.00
B = $ (5+5+2)	Total Weighted average contribution margin per unit	$            18.67
C = A/B	Break Even point in Sales unit	14464

Answer

Working		Product 1	Product 2	Product 3
A	Sales Mix	0.5	0.333333333	0.166666667
B = 22500 units x A	Individual Break Even in units - ANSWER	7232	4821	2411
C	Sale price per unit	$            40.00	$                30.00	$               20.00
D = B x C	Individual Break Even in Sales Dollars – ANSWER	$ 289,280.00	$     144,630.00	$      48,220.00

• Exercise 21.17

--Working

A	Contribution margin	$            432,000
B	Sales	$        2,160,000
C = (A/B) x 100	CM ratio	20.0%

--Requirement 1

A	Target pretax Income	$            162,000
B	Fixed Cost	$            324,000
C= A+B	Total Contribution margin required	$            486,000
D	CM ratio	20.0%
E = C/D	Sales Dollars required	$        2,430,000 = Answer

---Requirement 2

A	Actual Sale for 2018	$        2,430,000
B	Fixed Cost	$            324,000
C	CM ratio	20.0%
D = B/C	Break Even Sales Dollars	$        1,620,000
E = A - D	Margin of Safety Sales dollars	$            810,000
F = (E/A) x 100	Margin of Safety %	33.3% = Answer

• Exercise 21-25

--Requirement 1

A	Contribution margin	$            432,000
B	Pretax Income	$            108,000
C = A/B	Degree of Operating Leverage	4 = Answer

--Requirement 2

A	Decrease in Sales %	5%
B	Degree of Operating Leverage	4
C = A x B	Decreases in Pretax Income %	20.0%
D	2017's Pretax Income	$            108,000
E = D x C	Decrease in 2018	$              21,600
F = D - E	Actual Pretax Income for 2018	$              86,400 = Answer

--Requirement 3

Income Statement for 2018

Sales [9120 units at $225]	$        2,052,000
Variable Costs [9120 units x $ 180]	$        1,641,600
Contribution margin	$            410,400
Fixed Cost	$            324,000
Pretax Income [2018]	$              86,400