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markers, how many packs would have to be sold to make a profit of $50,000? 7 5 CVP and multiple product Spo stu me available: Sales Sales price Variable costs Fixed costs 250,000 units $0.55 $0.15 $80,000 per annum ELUI product. The blue marker would last twice as long in use as the yellow one. Introduction of the blue highlighter would involve the following costs: The Highlighter Company manufactures yellow marker pens. The following data z The management is thinking about introducing a blue marker to complement the yelox e If there were some cannibalisation of existing sales, i.e. sales of yellow markers fell by 40,000 on the introduction of the blue markers, how many blue markers would have to be sold to maintain the operating profit at the level it was before the introduction f If yellow and blue markers were sold in packs containing one blue and two yellow $50,000 Incremental fixed cost Variable costs 45 cents per unit Expected sales price 70 cents per unit Required a What was the original break-even point in units and dollar sales when the company made just yellow markers? b What was the operating income at sales of 250,000 units? c What was the margin of safety percentage? d What volume of sales of the blue markers would be needed to break-even? of the blue markers?

Answer 1

Requirement a Yellow markers 80,000 (i) Fixed Costs (ii ) Selling price p.u (iii) Variable cost p.u (iv) Contribution margin p.u $ $ 0.55 0.15 0.40 $ (v) Break-even point in units (i/iv) (vii) Break-even point in $ (ii*v) 200,000 $ 110,000 Requirement b Yellow markers 250000 (a) Sales in units (b) Revenue (0.55*a) (c) Total Variable costs (0.15*a) (d) Contribution margin (b-c) (e) Total fixed costs (f) Operating income (d-e) $ 137,500 $ 37,500 $ 100,000 $ 80,000 $ 20,000 Requirement c Total sales (-) Break-even point in units Margin of safety sales in units Margin of safety sales % (50000/250000) Yellow markers 250000 -200000 $ 50,000 20%

Requirement d Blue markers 50,000 (i) Incremental Fixed Costs (ii) Selling price p.u (iii) Variable cost p.u (iv) Contribution margin p.u $ $ $ 0.70 0.45 0.25 (v) Break-even point in units (i/iv) (vii) Break-even point in $ (ii*v) 200,000 $ 140,000 Requirement e (i) Fall in sale units of yellow marker (ii) Contribution margin p.u of yellow marker $ (iii) Total contribution margin reduced (i*ii) $ (iv) Incremental fixed cost for blue marker $ (v) Required contribution margin from blue (iii+iv) $ (vi) Contribution margin p.u for blue $ (vii) Units of blue marker to be sold (v/vi) 40000 0.40 16,000 50,000 66,000 0.25 264,000 Requirement f $ (1) Selling price per pack (1*0.70+2*0.55) (ii) Variable cost per pack (1*0.45+2*0.15) (iii) Contribution margin per pack (i-ii) (iv) Total fixed costs (80000+50000) (v) Target Operating income (vi) Required contribution (iv+v) (vii) No. of packs to be sold (vi/iii) $ 1.80 0.75 $ 1.05 $ 130,000 $ 50,000 $ 180,000 171,429