PROBLEM 5-27A Sales Mix; Break-Even Analysis; Margin of Safety [LOS-7, LOs-9 Isl

Question

PROBLEM 5-27A Sales Mix; Break-Even Analysis; Margin of Safety [LOS-7, LOs-9 Island Novelties, Inc., of Palau makes two products, Hawaian Fantasy and Tahitian Joy. Present revenue cost, and sales data for the two products follow: Hawaiian Tahitian Fantasy Joy $15 $100 $20 20,000 5,000 Selling price per unit.... Number of units sold annually... Fixed expenses total $475,800 per year. Required: 1. Assuming the sales mix given above, do the following: Prepare a contribution format income statement showing both dollar and percent columns for each a. 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 dollars and percent. 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 2. (sales of the other two products would not change) b. Compute the compa ny's new break-even point in dollar sales and the new margin of safety in both dollars and percent. The president of the company examines your figures and says, "There's something strange here. Our fixed expenses haven't changed and you show greater total contribution margin if we add the nevw product, but you also show our break-even point going up. With greater contribution break-even point should go down, not up. You've made a mistake somewhere." Explain to the president what has happened. 8. margin, the

Explanation / Answer

1 a Contribution format income statement

Hawaiin Fantasy

Tahitian Joy

Total

1. b Break-even point = ($475,800 / 65) x 100 = $732,000

Margin of Safety = Total Sales - Break even Sales

   = $800,000 - $732,000 = $68,000

Margin of Safety % = ($68,000 / $800,000) x 100 = 8.5%

2 a. Contribution format Income statement

2 b. Break Even point = ($475,800 / 48.8) x 100 = $975,000

   Margin of Safety = $1,250,000 - $975,000 = $275,000

   Margin of Safety % = ($275,000 / $1,250,000) x 100 = 22%

3. The reason for increase in break-even point is a change in the mix of products delivered. Company added Samoan Delight which increases company's total income but it has lower contribution margin say 20% and it consist a significant portion of total sales, so if a greater proportion of the units sold have a lower contribution margin, the company's break-even point will increase.

"it will be appreciated if you give your feedback."

1 a Contribution format income statement

Hawaiin Fantasy

Tahitian Joy

Total

Amount Percent Amount Percent Amount Percent Sales $300,000 100% $500,000 100% $800,000 100% Variable Cost $180,000 60% $100,000 20% $280,000 35% Contribution Margin $120,000 40% $400,000 80% $520,000 65% Fixed Expenses $475,800 Net Income $44,200

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