Sales Mix;
Break-Even Analysis; Margin of Safety
Island
Novelties, Inc, makes two products, Hawaiian Fantasy and Tahitian Joy. Present
revenue, cost, and sales data for the two products follow:
|
Hawaiian Fantasy |
Tahitian Joy |
|
|
Selling price per unit |
$15 |
$100 |
|
Variable expenses per unit |
$9 |
$20 |
|
Number of units sold annually |
20,000 |
5,000 |
Fixed expenses
total $475,800 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
break-even point in dollar sales for the company as a whole and the margin of
safety in both dollar and percent.
2. The company
has developed a new product to be called Samoan Delight. Assume that the
company could sell 10,000 units at $45 each. The variable expenses would be $36
each. The company’s fixed expenses would not change.
a. Prepare
another contribution format income statement, including sales of the Samoan
Delight (sales of the other two products would not change).
b. Compute the
company’s new break-even point in dollar sales and the new margin of safety in
both dollar and percent.
3. The president
of the company examines your figures and says, “There’s something strange here.
Our fixed costs haven’t change and you show greater total contribution margin
if we add new product, but you also show our break-even point going up. With
greater contribution margin, the break-even point should go down, not up.
You’ve made a mistake somewhere. Explain to the president what has happened.
