Question

On-the-Go, Inc., produces two models of traveling cases for laptop computers-the Programmer and the Executive. The bags have the following characteristics. Selling price per bag Variable cost per bag Expected sales (bags) per year $ Programmer 70 30 8,000 Executive $ 100 $ 50 12,000 The total fixed costs per year for the company are $663,000. Required: a. What is the anticipated level of profits for the expected sales volumes? b. Assuming that the product mix is the same at the break-even point, compute the break-even point. c. If the product sales mix were to change to nine Programmer-style bags for each Executive-style bag, what would be the new break-even volume for On-the-Go?

Answer 1

Contribution margin = Selling price - Variable cost

Programmer bags = $70 - $30 = $40

Executive bags = $100 - $50 = $50

a. Profit = (8,000 X $40) + (12,000 X $50) - $663,000 = $257,000

Sales mix = 8,000:12,000 = 2:3

Contribution margin for sales mix = (2 X $40) + (3 X $50) = $230

For 5 units the contribution margin is $230

b. Breakeven point = $663,000 X 5/230 = 14,413 units to breakeven

Sales mix = 9:1

Contribution margin for sales mix = (9 X $40) + (1 X $50) = $410

For 10 units the contribution margin is $410

c. Breakeven point = $663,000 X 10/410 = 16,171 units to breakeven