sland Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price,...
sland Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows:
| Hawaiian Fantasy | Tahitian Joy | |||||
| Selling price per unit | $ | 20 | $ | 110 | ||
| Variable expense per unit | $ | 9 | $ | 33 | ||
| Number of units sold annually | 22,000 | 6,000 | ||||
Fixed expenses total $664,000 per year.
Required:
1. Assuming the sales mix given above, do the following:
a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.
b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.
2. The company has developed a new product called Samoan Delight that sells for $30 each and that has variable expenses of $24 per unit. If the company can sell 22,000 units of Samoan Delight without incurring any additional fixed expenses:
a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.
b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.
Homework Answers
| 1) | Hawaiian Fantasy | Tahitian Joy | Total | ||||||
| a) | % | % | % | ||||||
| Sales (22000*20/6000*110) | 440000 | 100.00% | 660000 | 100.00% | 1100000 | 100.00% | |||
| Variable cost (22000*9+6000*33) | 198000 | 45.00% | 198000 | 30.00% | 396000 | 36.00% | |||
| Contribution margin | 242000 | 55.00% | 462000 | 70.00% | 704000 | 64.00% | |||
| Fixed expenses | 664000 | 60.36% | |||||||
| Net operating income | 40000 | 3.64% | |||||||
| b) | BEP in dollars = Fixed cost/CM ratio = 664000/64% = | 1037500 | |||||||
| Margin of safety in dollars = Current sales-BEP sales = 1100000-1037500 = | 62500 | ||||||||
| Margin of safety in %= (Current sales-BEP sales)/Current sales = (1100000-1037500)/1100000 = | 5.68% | ||||||||
| 2) | |||||||||
| a) | Hawaiian Fantasy | Tahitian Joy | Samoan Delight | Total | |||||
| % | % | % | % | ||||||
| Sales (22000*20/6000*110/22000*30) | 440000 | 100.00% | 660000 | 100.00% | 660000 | 100.00% | 1760000 | 100.00% | |
| Variable cost (22000*9+6000*33) | 198000 | 45.00% | 198000 | 30.00% | 528000 | 80.00% | 924000 | 52.50% | |
| Contribution margin | 242000 | 55.00% | 462000 | 70.00% | 132000 | 20.00% | 836000 | 47.50% | |
| Fixed expenses | 664000 | 37.73% | |||||||
| Net operating income | 172000 | 9.77% | |||||||
| BEP in dollars = Fixed cost/CM ratio = 664000/47.50% = | 1397895 | ||||||||
| Margin of safety in dollars = Current sales-BEP sales = 1760000-1397895 = | 362105 | ||||||||
| Margin of safety in %= (Current sales-BEP sales)/Current sales = (1760000-1397895)/1760000 = | 20.57% | ||||||||
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sland Novelties, Inc., of Palau makes two products—Hawaiian
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