Question

Rollie's Recreational Feet manufactures three types of footwear: hiking boots, cross-trainers, and sandals. The planning team is working through market research material for the upcoming season to assist in determining profitability for the coming year. The marketing manager reports that they sell twice the amount of hiking boots as cross-trainers, and twice as many sandaks as hiking boots. The controller has worked with the production and sales managers and purchasing to determine the following reves and variable costs Hiking Boots Cross Trainers Sandals Selling price per pair $150 $ 66 $ 30 Variable manufacturing costs 18 11 Variable selling & admin costs 15 12 8 Annual fixed costs are $400,000 Required: (Note: Answer each question based on the original data) a) How many pairs of each type of footwear have to be sold to achieve a before tax operating income of $150,000? Be sure to incorporate the expected sales mix in your calculations b) The controller wants to ensure that the risk levels are within reason. As such she wants to know the minimum number of pairs of each type of footwear to sell to maintain a margin of safety of 20%. What will be the operating income at this level? c) The marketing manager would like to increase the ratio of hiking boot sales in the product sales mix because the contribution margin is higher. He feels that if the selling price per pair were reduced to $120 and the company launched an advertising campaign at an annual fixed cost of $38,000, the sales mix of hiking boots to cross-trainers would rise to three to one. The sandals to cross-trainers sales mix would remain at four to one. If these changes are made and the sales mixchanged as projected, how many pairs of each type of footwear have to be sold to achieve a before-tax operating income of $150,000? Should Rollie's Recreational Feet reduce the price of its hiking boots and implement the advertising campaign? Explain

Answer 1

Total Selling price Variable manufacturing cost Variable selling and admin cost Contribution margin per unit Hiking Boots Cross-Trainers $150 $66 $50 $18 $15 $12 $85 $36 Sandals $30 $11 $8 $11. 2 Sales mix ratio based on units sold Weighted average contribution per unit 1 $5.14 $24.29 $6.29 $35.71 a) Units Units to be sold to achieve operating income target Total Fixed cost + Required Operating Income $550,000 Weighted average contribution per unit $35.71 15,400 Hiking Boots Cross-Trainers 4,400 2,200 Sandals 8,800 Paris of footwear to be sold (Allocated in ratio of Sales mix) b) Units Break even point Total Fixed cost Weighted average contribution per unit $400,000 $35.71 11,200 Break even point Margin of safety at 20% Total sales 11,200 2,800 11,200/80%*20% 14,000 Net operating income Total 14,000 Units to be sold (ratio of sales mix) Contribution margin per unit Total contribution margin Fixed cost Net operating income Hiking Boots Cross-Trainers 4,000 2,000 $85 $36 $340,000 $72,000 Sandals 8,000 $11 $88,000 $500,000 $400,000 $100,000 Total Selling price Variable manufacturing cost Variable selling and admin cost Contribution margin per unit Hiking Boots Cross-Trainers $120 $66 $50 $18 $15 $12 $55 $36 Sandals $30 $11 $8 $11 1 8 Sales mix ratio based on units sold Weighted average contribution per unit 3 $20.63 4 $5.50 $4.50 $30.63 Units Units to be sold to achieve operating income target Total Fixed cost + Required Operating Income $588,000 Weighted average contribution per unit $30.63 19,200 Hiking Boots Cross-Trainers 7,200 2,400 Sandals 9,600 Paris of footwear to be sold (Allocated in ratio of Sales mix) d) The units to be sold has increased compared a) above Hence the advertising campaign should not be implemented since it requires more units to be sol to achieve the target operating income