Question

Hakala plans to sell its Standard surfboard for $1,200 and its Limited Edition surfboard for $2,500. Hakala purchases the basic surfboard for $500 from its suppliers. Painting and further upgrades cost $300 for the Standard model and $700 for the Limited Edition model. Hakala expects to sell two Limited Edition models for every seven Standard models. Hakala's monthly fixed expenses are $34,520. 1. Given the expected sales mix, what is the expected weighted average contribution margin? Is this higher or lower than a simple average contribution margin? Explain. 2. Given this sales mix, how many surfboards, in total, must Hakala sell monthly to break even? 3. How many of each type of surfboard must Hakala sell monthly to breakeven? 4. Prove that your answer does, indeed, result in the company breaking even. 5. Answer the following without doing calculations: If the company actually sells 5 Standard models for every 3 Limited Edition model (rather than the expected 7 Standard: 2 Limited Edition sales mix), will the total number of units needed to break even be higher or lower? Why? 6. Prove your answer to part 5) by finding the total number of surfboards needed to break even under the actual sales mix.

Answer 1

Answer with working notes is given below

Standard Total Limited Edition $2,500 $1,200 Selling price Less: Variable cost Basic surfboard cost Painting and other cost Contribution per unit $500 S300 $500 $700 $1,300 $400 Ratio Weighted averaged Contribution $600.00 $311.111 $288.89 ($400/9*7) ($400/9*2) Simple average Contribution $850.00 ($400+$1,300)/2 Explanation: Weighted average contribution will be lower since it assigns Weightage for each unit sold Whereas simple average considers both as equal contributors In the given cased Limited Edition is having lower weight hence Weighted average contribution is lower than simple average Total units 2 Fixed Cost Weighted average contribution $34,520 $600.00 58 Standard Limited Edition 13 (58/9*2) Units to be sold rounded off) 45 (58/9*7) Standard Limited Edition Total Units to be sold Contribution per unit Total Contribution Less: Fixed cost Difference due to units rounding off $400 $18,000 $1,300 $16,900 $34,900 $34,520 $380 If units are not rounded off Standard Total Units to be sold Contribution per unit Total Contribution Less: Fixed cost Break even point 44.75 $400 $17,899 Limited Edition 12.79 $1,300 $16,621 $34,520 $34,520 0 5 Total number of units for breakeven will reduce since Weightage of limited edition model is higher 6 Fixed Cost Weighted average contribution Total units $34,520 47 $737.50 Break even point is reduced from 58 units to 47 units Total Standard $1,200 Limited Edition $2,500 Selling price Less: Variable cost Basic surfboard cost Painting and other cost Contribution per unit $500 $300 $400 $500 $700 $1,300 Ratio Weighted averaged Contribution | $250.00 $487.50 $737.50