Question

PROBLEM 2-27 Sales Mix; Break- Island Novelties, Inc., of Pa product's selling price, variable les Mix; Break-Even Analysis; Margin of Safety LO2-7. L02-9 akes two products-Hawaiian Fantasy and Tahitian Joy. Each orice, variable expense per unit and annual sales volume are as follows: Selling price per unit. Variable expense per unit. Number of units sold annually..... Hawaiian Fantasy $15 $9 20,000 Tahitian Joy $100 $20 5,000 Fixed expenses total $475,800 per year. Required: 1. Assuming the sales mix given above, do the following: Prepare a contribution format income statement showing both dollar and percent col. umns for each product and for the company as a whole. b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage. 2. The company has developed a new product called Samoan Delight that sells for $45 each and that has variable expenses of $36 per unit. If the company can sell 10,000 units of Samoan Delight without incurring any additional fixed expenses: a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change. b. Compute the company's revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage. 3. The president of the company examines your figures and says, "There's something strange here. Our fixed expenses haven't changed and you show greater total contribu if we add the new product, but you also show our break-even point going up. contribution margin, the break-even point should go down, not up. You've mad somewhere." Explain to the president what has happened

Answer 1

1. a & b

ISLAND NOVELTIES INC Hawaiian Fantasy $ Amount % Value Sales = Units produced & sold x selling price per unit 300000 100% (-) Variable Expenses = Units Produced and sold x variable cost per unit 180000 60% Contribution Margin 120000 40% (-) Common Fixed Expenses Net Operating Income Tahitian Joy Total $ Amount% Value $ Amount% Value 500000 100% 800000 100% 100000 20% 280000 35% 400000 80% 520000 65% 475800 44200 6% 59% ISLAND NOVELTIES INC Hawaiian Fantasy $ Amount % Value Sales = Units produced & sold x selling price per unit 300000 100% 1-) Variable Expenses = Units Produced and sold x variable cost per uni 180000 60% Contribution Margin 120000 40% Company Fixed Expenses Breakeven Point in Dollar Sales (Fixed expenses/company's contribution margin ratio) Margin of Safety = Actual Sales - Breakeven Point Margin of Safety % = (Actual Sales - Breakeven Point / Actual Sales Tahitian Joy Total $ Amount% Value $ Amount% Value 500000 100% 800000 100% 100000 20% 280000 35% 400000 80% 520000 65% 475800 732000 68000 9%

2. a & b

Sales = Units produced & sold x selling price per unit (-) Variable Expenses = Units Produced and sold x variable cost per uni Contribution Margin (-) Common Fixed Expenses Net Operating Income ISLAND NOVELITIES INC Hawaiian Fantasy Tahitian Joy Samoan Delight Total $ Amount% Value $ Amount% Value $ Amount % Value $ Amount% Value 300000 100% 500000 100% 450000 100% 1250000 100% 180000 60% 100000 20% 360000 80% 640000 51% 120000 40% 400000 80% 90000 20% 610000 49%) 475800 38% 134200 11%) ISLAND NOVELITIES INC Hawaiian Fantasy Tahitian Joy | Samoan Delight Total s Amount% Value s Amount% Value $ Amount % Value $ Amount% Value Sales = Units produced & sold x selling price per unit 300000 100% 500000 100% 450000 100% 1250000 100%) 1-) Variable Expenses = Units Produced and sold x variable cost per uni 180000 60% 100000 20% 360000 80% 640000 51% Contribution Margin 1200001 40% 400000 80% 90000 20% 610000 49% Company Fixed Expenses 475800 Breakeven Point in Dollar Sales (Fixed expenses/company's contribution margin ratio) 975000 Margin of Safety = Actual Sales - Breakeven Point 275000 Margin of Safety % = (Actual Sales - Breakeven Point / Actual Sales 22%

3. With one new product addition of Samoan Delight total contribution margin amount has increase but Contribution margin % has reduced . Contribution margin is sales minus the variable expenses. ... Since new product  have lower contribution margins than others, if a greater proportion of the lower contribution margin items are sold, the company will need to sell more units, thereby increasing the company's break-even point. In this case With the addition of Samonan delight company break even point has increased.