Question 3 Inland Company manufactures and sells three products, Red, White and

Question

Question 3 Inland Company manufactures and sells three products, Red, White and Blue. Their individual selling prices are: Red, S55 per unit; White, $85 per unit; and Blue, $110 per unit. The variable costs of manufacturing and selling these products are: Red, $40 per unit; White, $60 per unit; and Blue, $80 per unit. Their sales mix is a ratio of 5:4:2 (Red:White:Blue). Annual fixed costs shared by all three products are $150,000. One item of raw materials is used in manufacturing all three products. Management has learned that a new material is of equal quality and less costly. The new material would reduce the variable costs as follows: Red by $10; White by $20, and Blue by $10. But, the new material requires new equipment, which will increase annual fixed costs by $20,000. (In preparing your answers always round up to the nearest whole composite unit.)

Explanation / Answer

Part A

Weighted average selling price =sum of (selling price of each product * weightage of respective product) = (55*5/11)+(85*4/11)+(110*2/11) = 75.91

Weighted average variable expense = sum of (variable expense of each product * weightage of respective product) = (40*5/11)+(60*4/11)+(80*2/11) = 54.55

Breakeven point in units = total fixed expenses / (Weighted selling price - Weighted variable expense) = 150000/(75.91-54.55) = 7022 units

Breakeven point in units

Red = 7022*5/11 = 3192 units

White = 7022*4/11= 2553 units

Blud = 7022*2/11 = 1277 units

Breakeven point in dollars

Red = 3192 units * 55 = 175560

White = 2553 units * 85 = 217005

Blue = 1277 units * 110 = 140470

Part B

New Weighted average variable expense = sum of (variable expense of each product * weightage of respective product) = (30*5/11)+(40*4/11)+(70*2/11) = 40.91

Breakeven point in units = total fixed expenses / (Weighted selling price - Weighted variable expenses) = 170000/(75.91-40.91) = 4857

Breakeven point in units

Red = 4857*5/11 = 2208 units

White = 4857*4/11= 1766 units

Blue = 4857*2/11 = 883 units

Breakeven point in dollars

Red = 2208 units *55 = 121440

White = 1766 units * 85 = 150110

Blue = 883 units *110 = 97130

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