Hearth Manufacturing Company produces two models of wood burning stoves, Cozy Ki

Question

Hearth Manufacturing Company produces two models of wood burning stoves, Cozy Kitchen and All-House. Presented is sales information for 2012.

a) Determine the current break-even point in sales dollars.

b) With the current product mix and break-even point, determine the average contribution margin and unit sales.

c) Sales representatives believe that total unit sales will increase to 3,000 units, with the sales mix likely shifting to 80% Cozy Kitchen and 20% All House over the next few years. Evaluate the desirability of this projection.

Cozy Kitchen All-House Total Units manufactured and sold 1,000 1,500 2,500 Sales revenue $300,000 $750,000 $1,050,000 Variable costs (200,000) (450,000) (650,000) Contrribution margin $100,000 $300,000 400,000 Fixed costs (240,000) Before-tax profits 160,000 Income taxes (40%) (64,000) After-tax profit $96,000

Explanation / Answer

1 Per unit Sales 1050000 Variable cost 650000 Contribution margin 400000 Contribution margin ratio = Contribution margin / sales price Contribution margin 400000 Sales 1050000 Contribution margin ratio 38.10% (400000/1050000) Breakeven sales in dollars = Fixed expense / Contribution margin ratio Fixed expense 240000 Contribution margin ratio 38% Breakeven sales in dollars 630000 2 Current product mix Cozy kitchen 0.29 (300000/1050000) All house 0.71 (750000/1050000) Breakeven sales in dollars 630000 Cozy kitchen All house Total Sales in revenue 180000 450000 630000 Variable cost 120000 270000 390000 Contributio margin 60000 180000 240000 Cozy kitchen All house Sales in units 600 900 (180000/300) (450000/500) 3 Cozy kitchen All house Total Sales in units 2400 600 3000 Sales in revenue 720000 300000 1020000 Variable cost 480000 180000 660000 Contributio margin 240000 120000 360000 Fixed costs 240000 Before tax profit 120000 Income tax 40% 48000 After tax profit 72000

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