Question

Hewtex Electronics manufactures two products, headsets and electronic calculators, and sells them nationally to wholesalers and retailers. The Hewtex management is very pleased with the company’s performance for the current fiscal year. Projected sales suggest that 120,000 headsets and 190,000 calculators will be sold this year. The projected earnings statement which follows, shows that Hewtex will not meet its profit goal of 9% of sales after tax.

1. Assuming that the sales mix in the plan document is achieved, how many headsets and calculator units would Hewtex have to sell to break even?

Hewtex Electronics Projected Income Statement for the year ending 31.3.2xxx
	120,000 units headsets		190,000 units calculators		Total
	Total Amt $000s	Per unit $	Total Amt $ 000s	Per unit $	Amt $ 000s
Sales	1,800	15	5,320	28	7,120
Variable costs: Materials Labour Others	480 360 120	4 3 1	1140 1710 570	6 9 3	1620 2070 690
Maintenance	280	2.33	1400	7.37	1680
Total costs	1240	10.33	4820	25.37	6060
Gross margin	560	4.67	500	2.63	1060
Facility sustaining cost					2000
Net income					(940)

2. What volume of sales is required if Hewtex Electronics is to earn a profit in the next year equal to 9% of sales?
3. Hewtex now allocates costs based on flexible labour costs. A study has determined that committed costs are as follows: (1) supervisory costs for headset production -$500,000, (2) supervisory salaries for calculator production $600,000. The balance of the committed costs are proportional to the number of batches of production. Hewtex schedules headsets for production in batch sizes of 1000, and 10,000 for calculators. Finally, $300,000 of cost which was originally seen as committed costs, was attributable to tape recorders, and $400,000 was attributable to calculators. Recast the original projection to correct the costing errors due to misclassification.

Answer 1

1.

	Headsets	Calculators
Selling Price per Unit	$ 15	$ 28
Less: Variable Cost per Unit	8	18
Contribution Margin per Unit	$ 7	$ 10
Proportion of Sales	120/310	190/310

Let the break-even quantity be Q.

At break-even point, total contribution margin equals total fixed cost.

Weighted Average Contribution Margin = 7 ( 120 / 310) Q + 10 ( 190 / 310 ) Q = 3,680

840Q + 1,900Q = 3,680 x 310 = 1,140,800

Q = 416,350 units

Number of headsets at break-even = 120 / 310 * 416,350 = 161,167.74 units

Number of calculators to break-even = 190 / 310 * 416,350 = 255,182.26 units