Question

Warm Hands, a small company based in Prince Edward Island, manufactures and sells two types of lightweight gloves for runners—Warm and Cozy. Current revenue, cost, and unit sales data for the two products appear below:

	Warm		Cozy
Selling price per pair	$8.00		$12.00
Variable expenses per pair	$2.00		$6.00
Number of pairs sold monthly	1,200	units	400	units

Fixed expenses are $3,510 per month.

Required:

1. Assuming the sales mix above, do the following:

a. Prepare a contribution format income statement showing both dollars and percentage columns for each product and for the company as a whole. (Round percentage answers to 2 decimal places.)

	WARM HANDS Contribution Income Statement Warm Cozy Total % % % Sales ? ? ? ? ? ? Variable expenses ? ? ? ? ? Contribution margin ? ? ? ? ? ? Fixed expenses ? Operating income ?

b. Compute the break-even point in dollars for the company as a whole and the margin of safety in both dollars and percentage of sales. (Do not round your intermediate calculations. Round percentage answer to 2 decimal places.)

	Break-even sales dollars ? Margin of safety in dollars ? Margin of safety in percentage ? %

c. Compute the break-even point in units for the company as a whole and the margin of safety in both units (pairs of gloves) and percentage of sales. (Round percentage answer to 2 decimal places.)

	Break-even units ? Margin of safety in units ? Margin of safety in percentage ? %

d. Compute how many pairs of gloves must be sold overall if the company wants to make an after-tax target profit of $16,800 and the tax rate is 30%. Assume that the sales mix remains the same as shown above.

2. The company has developed another type of gloves that provide better protection in extreme cold, Toasty, which the company plans to sell for $20.00 per pair. At this price, the company expects to sell 400 pairs per month of the product. The variable expense would be $16.00 per pair. The company’s fixed expenses would not change.

a. Prepare another contribution format income statement, including sales of Toasty (sales of the other two products would not change). (Round percentage answers to 2 decimal places.)

	WARM HANDS Contribution Income Statement Warm Cozy Toasty Total   Sales    %    % %    % Variable expenses ? ? ? ? ? ? ? ? contribution margin ? ? ? ? ? ? ? ? fixed expenses $0 0 $0 0.00 $0 0.00 $0 0.00 net operation income ? $0

b. Compute the company’s new break-even point in dollars for the company as a whole and the new margin of safety in both dollars and percentage of sales. (Round your break-even sales to the nearest whole dollar amount and percentage answer to 2 decimal places.)

	Break-even sales dollars ?    Margin of safety in dollars ? Margin of safety in percentage ? %

Answer 1

Answer with working is given below

WARM HANDS Contribution Income Statement Warm Cozy Total Sales Variable expenses Contribution margin Fixed expense Operating Income $9,600 $2,400 $7,200 100.00% 25.00% 75.00% $4,800 $2,400 $2,400 100.00% 50.00% 50.00% $14,400 $4,800 $9,600 $3,510 $6,090 100.00% 33.33% 66.67% b) Break Even dollars Fixed Cost Contribution margin $3,510 66.67% $5,265 Margin of Safety in dollars Total Sales in dollars Break even sales in dollars Margin of Safety in dollars (Total Sales- Break even sales) $14,400 $5,265 $9,135 Margin of Safety in Percentage Margin of Safety in dollars Total Sales in dollars Margin of Safety in Percentage (MOS / Total Sales) *100 $9,135 $14,400 63.44% c) Break Even units Fixed Cost $3,510 Weighted average contribution margin (see WN below for weighted Avg contribution) 585 Margin of Safety in units Total Sales in units Break even sales in units Margin of Safety in dollars (Total Sales- Break even sales) 1,600|(1,200 + 400 units) 585 As calculated above 1,015 1,015 Margin of Safety in Percentage Margin of Safety in units Total Sales in units Margin of Safety in Percentage (MOS/Total Sales) *100 1,600 63.44% Working notes: Warm Cozy Total Sales Variable expenses Contribution margin - A $8.00 $2.00 $6.00 100.00% 25.00% 75.00%) $12.00 $6.00 $6.00 100.00% 50.00% 50.00% Sales units Selling price per unit Total Sales Sales mix-B Weighted average contribution - (AXB) 1,200 $8.00 $9,600 66.67% $4.00 400 $12.00 $4,800 33.33% $2.00 $14,400 100.00% $6.00 After tax profit Tax rate Pre-tax profit $16,800 30% $24,000 $16,800/(1-30%) Total Target needed Pre-tax profit Add: Fixed Cost Total Target needed $24,000 $3,510 $27,5101 Total pair of gloves to be sold Total target needed Weighted average contribution margin $23:5204,585 $27,510 $6 4,585 WARM HANDS Contribution Income Statement Warm Cozy Toasty Total % Sales - (Units X Selling price) Variable expenses Contribution margin Fixed expense Net Operating Income $9,600 $2,400 $7,200 100.00% 25.00% 75.00%|_ $4,800 $2,400 $2,400 100.00% 50.00% 50.00% $8,000 $6,400 $1,600 100.00% 80.00% 20.00% $22,400 $11,200 $11,200 $11,200 $3,510 $7,690 100.00% 50.00% 50.00% b) Break Even dollars Fixed Cost Contribution margin $3,510 $7,020 50.00% Margin of Safety in dollars Total Sales Break even sales Margin of Safety in dollars (Total Sales- Break even sales) $22,400 $7,020 $15,380 Margin of Safety in Percentage Margin of Safety in dollars Total Sales Margin of Safety in Percentage (MOS/Total Sales) *100 $15,380 $22,400 68.66%