Question

HC Company manufactures different sizes of toys. The manager has just received the sales forecast for the coming year for the coming year for the two different products: small toys and big toys. HC Company went through different variations in sales volume and variable costs over the last couple of years. The forecast should be examined from a Cost-Volume-Profit (CVP) viewpoint. The information for 2019 is presented as:

	Small Toys	Big toys
Unit sales	80,000	120,000
Unit selling price	$36	$48
Variable manufacturing cost per unit	$12	$26
Variable selling cost per unit	$2	$4

For 2019, HC Company fixed factory overhead is $2,200,000 and fixed selling and admin expense are forecasted to be $800,000

1) After preparing the original data, the company found out that its variable manufacturing cost of big toys would increase by 30% and the variable selling costs of small toys would increase by $4 per unit. The company has decided not to change the selling price of either product. Sales mix will also remain unchanged. Calculate how many units of each product the company would have to sell in order to breakeven in 2019.

2) Calculate Margin of Safety in 2019

Answer 1

Solution:

1.

	Small Toy	Big Toys
Sales (Units)	80000	120000
Sales Mix Percentage	40%	60%
Selling Price	36	48
Less: VariableCosts
Manufacturing Cost	12	33.8
Selling Cost	6	4
Contribution Margin	18	10.2
Sales mix Percentage	40%	60%
Weighted Average CM (CM per unit * Sales Mix)	7.2	6.12
Sum of Weighted Average CM	13.32

Total Fixed Cost
Factory	2200000
Selling	800000
Total Fixed Cost	3000000

Break Even Point in units of Sales Mix	= Fixed Cost / Weighted Avg. CM per unit
	=$3,000,000 / $13.32
	225225	Units

BEP Units	Small Toy	Big Toys
Sales (Units)	80000	120000
Sales Mix Percentage	40%	60%
x Total Break Even Units	225225	225225
Units to be sold to break even	90090	135135

2.

Margin of Safety
Total Sales (80000*36) +(120000*48)	8640000
Less: BEP Sales (90090*36) +(135135*48)	9729720
Margin of Safety	-1089720