Question

Topper Sports, Inc., produces high-quality sports equipment. The company's Racket Division manufactures three tennis rackets—the Standard, the Deluxe, and the Pro—that are widely used in amateur play. Selected information on the rackets is given below: Standard $ 45.00 Deluxe $ 70.00 Pro $100.00 Selling price per racket Variable expenses per racket: Production Selling (54 of selling price) $ 27.00 $ 2.25 $ 35.00 $ 3.50 $ 36.00 $ 5.00 All sales are made through the company's own retail outlets. The Racket Division has the following fixed costs: Fixed production costs Advertising expense Administrative salaries Total Per Month $ 138,000 118,000 68,000 $ 324,000 Sales, in units, over the past two months have been as follows: April May Standard Deluxe 2,000 1,000 8,000 1,000 Pro Total 5,000 8,000 3,000 12,000 Required: 1-a. Prepare contribution format income statements for April. 1-b. Prepare contribution format income statements for May. 3. Compute the Racket Division's break-even point in dollar sales for April. 4. Whether the break-even point would be higher or lower with May's sales mix than with April's sales mix? 5. Assume that sales of the Standard racket increase by $21,800. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $21,800? Do not prepare income statements, use the incremental analysis approach in determining your answer.

Answer 1

Requirement 1A:

Topper sports Inc
Income statement for April
	Standard			Deluxe			Pro			Total
	Amount	%		Amount	%		Amount	%		Amount	%
Sales revenue	$         90,000	100	%	$       70,000	100	%	$       500,000	100	%	$       660,000	100	%
Variable Expenses:
Variable production Costs	$         54,000	60	%	$       35,000	50	%	$       180,000	36	%	$       269,000	40.76	%
Sales Commission	$           4,500	5	%	$          3,500	5	%	$          25,000	5	%	$          33,000	5	%
Total Variable Expenses	$         58,500	65	%	$       38,500	55	%	$       205,000	41	%	$       302,000	45.76	%
Contribution Margin	$        31,500	35	%	$       31,500	45	%	$       295,000	59	%	$       358,000	54.24	%
Fixed Expenses:
Fixed Production Cost										$       138,000	20.91	%
Advertising										$       118,000	17.88	%
Administrative										$          68,000	10.3	%
Total Fixed Expenses										$       324,000	49.09	%
Net operating Income										$         34,000	5.15	%

Requirement 1B:

Topper sports Inc
Income statement for May
	Standard			Deluxe			Pro			Total
	Amount	%		Amount	%		Amount	%		Amount	%
Sales revenue	360000	100	%	70000	100	%	300000	100	%	$       730,000	100	%
Variable Expenses:
Variable production Costs	216000	60	%	35000	50	%	108000	36	%	$       359,000	49.18	%
Sales Commission	18000	5	%	3500	5	%	15000	5	%	$          36,500	5	%
Total Variable Expenses	234000	65	%	38500	55	%	123000	41	%	395500	54.18	%
Contribution Margin	126000	35	%	31500	45	%	177000	59	%	334500	45.82	%
Fixed Expenses:
Fixed Production Cost										138000	18.9	%
Advertising										118000	16.16	%
Administrative										68000	9.32	%
Total Fixed Expenses										324000	44.38	%
Net operating Income										10500	1.44	%

Requirement 3:

Break even point in dollar sales

$ 597,345

Working:

3.Break even Point for april month:
Fixed cost	$      324,000
Contribution margin ratio	54.24%
Break even point [324000/54.24%]	$      597,345

Requirement 4:

HIGHER

Reason:

The break even point for the month of may would be higher because the contribution margin ratio of may is lower compared to contribution ratio of april

Requirement 5:

	Standard	Pro
Net operating income	$      7,630	$      12,862

Calculation:

Incremental analysis approach :

Increase in net operating income due to increase in standard sales = $21,800*35% = $ 7,630

Increase in net operating income due to increase in Pro sales = $21,800*59% = $ 12,862