Question

Fall For Pun Company sells three products. Last year's cost and revenue data for these products were the following: Product Parachutes Hang gliders Bungee jumping harnesses Sales Revenue $750,000 $800,000 $300,000 Variable Costs $450,000 $600,000 $150,000 Average Unit Price $250.00 $1,600.00 $150.00 Fixed costs were $ 490,000, while fixed revenues were $35.000. For next year the management team is forecasting an increase in fixed cost of approximately 15%. You are required to determine: 1. the break-even point in sales dollars for the next year, assuming that the company will achieve: & the worst possible selling mix; b. the best possible selling mix; c. & selling mix equal to the historical one. 2. how many units of each product the company should sell in order to reach the level of break-even considered under 1.c. 3. the margin of safety if the break-even level is the one deriving from hypothesis 1.c and the budgeted sales mix (in units) is the following: 1,400 for parachutes, 600 for hang gliders, and 1,900 for bungee jumping harnesses.

Answer 1

Based on details available let us calculate contribution per unit and contribution ratio to sales price :

Product	Sales Revenue (a)	Variable Costs (b)	Average Unit price ( c)	No of Unit (d=a/c)	Variable Cost per unit (e=b/c)	Contribution per unit (f=c-e)	Contribution % to selling price (g=f/c*100)
Parachutes	750,000	450,000	250	3000	150	100	40%
Hang Gliders	800,000	600,000	1,600	500	1,200	400	25%
Bungee Jumping Harness	300,000	150,000	150	2000	75	75	50%

Based on detail let us also calculate fixed cost :

Existing Fixed Cost	490,000
Add : 15% Increment	73,500
Total Fixed overhead	563,500
Less : Fixed revenue	(35,000)
Net fixed cost	528,500

Let us answer first question - all three subpart one by one

a. Sales Break even point for worst selling mix

Worst possible selling mix means the product which contribution % to sales price is lowest will only be sold which is Hand Gliders having 25% contribution

Break even sales point	Total Fixed cost / Contribution per unit * selling price per unit
Break even Sales Point	2,114,000	(528500/75*150)

b. Sales Break even point for best selling mix

Worst possible selling mix means the product which contribution % to sales price is highest will only be sold which is Bungee Jumping Harness having 50% contribution

Break even sales point	Total Fixed cost / Contribution per unit * selling price per unit
Break even Sales Point	1,057,000	(528500/75*150)

c. Break even sales for selling mix as per historic one & Q.2 how many unit will be sold at break even point

Quantity Proportion
Product	No of Unit sold	Proportionate contribution of each product	Contribution per Unit	Proportionate contribution per unit
Parachutes	3000	54.55%	100	54.55
Hang Gliders	500	9.09%	400	36.36
Bungee Jumping Harness	2000	36.36%	75	27.27
Total	5500	100.00%	575	118.18

Breakeven Sales Unit	Fixed cost / Total proportionate contribution
Breakeven Sales Unit	4471.92308	(528500/118.18)

Products	Number of Units to be sold	Contribution per unit	Total contribution	Selling price per unit	Total Selling price
Parachutes	2,439.23	100.00	243,923.08	250.00	609,807.69
Hang Gliders	406.54	400.00	162,615.38	1,600.00	650,461.54
Bungee Jumping Harness	1,626.15	75.00	121,961.54	150.00	243,923.08
Total	4,471.92		528,500.00		1,504,192.31

In view of above break even sales point is 15,04,192 & Quantity of each product to be sold is :

Parachutes	2439.23
Hang Gliders	406.54
Bungee Jumping Harness	1626.15

Q.3 Safety margin between 1c & Hypothesis sales

Safety Margin sales = Budgeted sales - Breakeven Sales

90,807 : 15,95,000 - 15.04,192

Products	Quantity	Selling Price per unit	Total sales value
Parachutes	1400	250	350,000
Hang Gliders	600	1,600	960,000
Bungee Jumping Harness	1900	150	285,000
Total			1,595,000

In view of above 90,807 is safety margin for budgeted sales against historic one breakeven sales mix