Question

Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 43,000 units of each product. Sales and costs for each product follow.

	Product T					Product O
Sales		$	761,100				$	761,100
Variable costs			608,880					76,110
Contribution margin			152,220					684,990
Fixed costs			33,220					565,990
Income before taxes			119,000					119,000
Income taxes (30% rate)			35,700					35,700
Net income		$	83,300				$	83,300

Required:
1. Compute the break-even point in dollar sales for each product. (Enter CM ratio as percentage rounded to 2 decimal places.)
2. Assume that the company expects sales of each product to decline to 26,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 30% tax rate). Also, assume that any loss before taxes yields a 30% tax benefit. (Round "per unit" answers to 2 de

3. Assume that the company expects sales of each product to increase to 57,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 30% tax rate). (Round "per unit" answers to 2 decimal places.)cimal places. Enter losses and tax benefits, if any, as negative values.)

Answer 1

Selling price per unit of product T = 761100 / 43000 = 17.7

Variable cost per unit of product T = 608880 / 43000 =

14.16

Contribution margin of product T = 17.7 - 14.16 = 3.54

Selling price per unit of product O = 761100 / 43000 = 17.7

Variable cost per unit of product O = 76110 / 43000 = 1.77

Contribution margin per unit of product O = 17.7 - 1.77 = 15.93

1 break even point in unit = fixed cost / contribution margin per unit

Break even point in sales = break even point in unit × selling price

Contribution margin per unit = selling price per unit - variable cost per unit

Product T break even point in unit = 33220 / 3.54 = 9384

Product T break even point in sales = 9384 × 17.7 = 166100

Product O break even point in unit = 565990 / 15.93 = 35530

Product O break even point in sales = 35530 × 17.7 = 628881

2 sales of each products decline to 26000 units

	PRODUCT T	PRODUCT O
Sales	460200	460200
Less variable cost	368160	46020
Contribution margin	92040	414180
Fixed	33220	565990
Earnings before taxes 30%	58820	(151810)
Tax benefit and expenses	(17646)	45543
Net income or loss	41174	(106267)

There is a tax benefit for product O and net loss for product O

3 sales of each products increase to 57000

	PRODUCT T	PRODUCT O
SALES	1008900	1008900
Less variable cost	807120	100890
Contribution margin	201780	908010
Fixed cost	33220	565990
Earnings before taxes 30%	168560	342020
Tax expenses	50568	102606
Net income	117992	239414

The above are the detailed calculations and equations