Sales Mix; Multiproduct Break-Even Analysis
Topper Sports, Inc., produces high-quality sports equipment. The company’s Racket Division manufactures three tennis rackets-the Standard, the Deluxe, and the Pro – that are widely used in amateur play. Selected information on the rackets is given below:
| Standard | Deluxe | Pro |
Selling price perracket$60.00 $90.00 Variable expenses per racket | $40.00 | $60.00 | $90.00 |
Production | $22.00 | $27.00 | $31.50 |
Selling (5% of selling price) | $2.00 | $3.00 | $4.50 |
All sales are made through the company's own retail outlets, The Racket Division has the following fixed costs:
| Per Month |
Fixed production costs | $120,00 |
Advertising expense | 100,000 |
Administrative salaries | 50,000 |
Total | $270,000 |
Sales in units over the past two months have been as follows:
| Standard | Deluxe | Pro | Total |
April | 2,000 | 1,000 | 5,000 | 8,000 |
May | 8,000 | 1,000 | 3,000 | 12,000 |
Required:
1. Prepare contribution format income statements for April and May Use the following headings
Standard | Deluxe | Pro | Total | ||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent |
Sales |
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Etc |
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Place the fixed expenses only in the Total column Do not show percentages for the fixed expenses.
2. Upon seeing the income statements in (1) above, the president stated,“1can’t believe this! We sold 50% more rackets in May than in April, yet profits went down. It’s obvious that costs are out of control in that division ”What other explanation can you give for the drop in net operating income?
3. Compute the Racket Division's break-even point in dollar sales for April.
4. Without doing any calculations. explain whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix,
5. Assume that sales of the Standard racket increase by $20.000. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $20,000) Do not prepare income statements: use the incremental analysis approach in determining your answer
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