Question

1. Multiple-Product Analysis, Changes in Sales Mix, Sales to Earn Target Operating Income

   Kenno Company produces two products: squares and circles. The projected income for the coming year, segmented by product line, follows:
   
   

   	Squares		Circles		Total
   Sales	$300,000		$2,500,000		$2,800,000
   Less: Variable expenses	100,000		500,000		600,000
   Contribution margin	200,000		2,000,000		2,200,000
   Less: Direct fixed expenses	28,000		1,500,000		1,528,000
   Product margin	$172,000		$500,000		$672,000
   Less: Common fixed expenses					100,000
   Operating income					$572,000

   
   

   The selling prices are $30 for squares and $50 for circles.

   Required:

   1.  Compute the number of units of each product that must be sold for Kenno Company to break even.
   

   Squares	fill in the blank 1 units
   Circles	fill in the blank 2 units

   2.  Assume that the marketing manager changes the sales mix of the two products so that the ratio is three squares to five circles. Compute the number of units of each product that must be sold for Kenno Company to break even. Round your answers to the nearest whole number.

   Squares	fill in the blank 3 units
   Circles	fill in the blank 4 units

   3.  Refer to the original data. Suppose that Kenno can increase the sales of squares with increased advertising. The extra advertising would cost an additional $245,000, and some of the potential purchasers of circles would switch to squares. In total, sales of squares would increase by 25,000 units, and sales of circles would decrease by 5,000 units. Would Kenno be better off with this strategy? If so, give the amount of increase in income.
   Yes    $fill in the blank 6

   Feedback

   1. See Cornerstone 4.7.

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