Question

"I'll never understand this accounting stuff, Blake Dunn yelled, waving the income statement he had just received from his accountant in the morning mail. "Last month, we sold 2,000 stuffed State University mascots and earned $6,565 in operating income. This month, when we sold 3,000 I thought we'd make $9,848. But this income statement shows an operating income of $11,615! How can I ever make plans if I can't predict my income? I'm going to give Janice one last chance to explain this to me," he declared as he picked up the phone to call Janice Miller, his accountant. "Will you try to explain this operating income thing to me one more time?" Blake asked Janice. "After I saw last month's income statement, I thought each mascot we sold generated $3.28 in net income, now this month, each one generates $3.87! There was no change in the cost we paid for each mascot, so I don't understand how this happened. If I had known I was going to have $11,615 in operating income, I would have looked more seriously at adding to our product line." Taking a deep breath, Janice replied, "Sure, Blake. I'd be happy to explain how you made so much more operating income than you were expecting

Answer 1

Contribution Margin per unit for Blankets = $60 - 32 - 0.95 = $27.05 per unit

Weighted Average Contribution Margin per unit = ($27.05 + 4 x $5.05) / 5 = $9.45 per unit

Break even units = Fixed Costs / Weighted Average Contribution Margin per unit
= $3660 / 9.45 = 387 units or 388 units

Blankets = 387 / 5 = 77 units or 78 units
Mascots = 387 / 5 x 4 = 310 units

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