Question

Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $280 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $414,400, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $168 per 100 yards of XT rope. 1. Estimate Product XT’s break-even point in terms of sales units and sales dollars. (1 unit = 100 yards) (Do not round intermediate calculations.)

Contribution Margin per 100 yds. Contribution margin 0 Contribution Margin ratio Choose Numerator: I Choose Denominator: = Contribution Margin Ratio Contribution margin ratio 1(a) Estimate Product XT's break-even point in terms of sales units. (1 unit = 100 yards) Choose Numerator: Choose Denominator: Break-Even Units Break-even units II

2. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.

Answer 1

Contribution Margin			per 100 yds.
	Sales		280
Less:	Variable cost		168
	Contribution margin		112
Contribution Margin ratio
	Choose Numerator:	/	Choose Denominator:	=	Contribution Margin Ratio
	CM per unit	/	Sales per unit	=	Contribution margin ratio
	112	/	280	=	40%
1(a) Estimate Product XT’s break-even point in terms of sales units. (1 unit = 100 yards)
	Choose Numerator:	/	Choose Denominator:	=	Break-Even Units
	Fixed costs	/	Contribution margin per unit	=	Break-even units
	414400	/	112	=	3700	units
1(b) Estimate Product XT’s break-even point in terms of sales dollars.
	Choose Numerator:	/	Choose Denominator:	=	Break-Even Dollars
	Fixed costs	/	Contribution margin ratio	=	Break-even dollars
	414400	/	40%	=	1036000
2
PRAVEEN CO.
Contribution Margin Income Statement (at Break-Even) — Product XT
		Units	$ per unit	Total
	Sales	3,700	280	1036000
Less:	Variable cost	3,700	168	621600
	Contribution margin	3,700	112	414400
Less:	Fixed costs			414400
	Net income			0