Question

Vernon Company produces two products. Budgeted annual income statements for the two products are provided here:

	Power										Lite										Total
	Budgeted	Per					Budgeted				Budgeted	Per					Budgeted				Budgeted	Budgeted
	Number	Unit					Amount				Number	Unit					Amount				Number	Amount
Sales	270	@	$	690		=	$	186,300			630	@	$	580		=	$	365,400			900	$	551,700
Variable cost	270	@		420		=		(113,400	)		630	@		350		=		(220,500	)		900		(333,900	)
Contribution margin	270	@		270		=		72,900			630	@		230		=		144,900			900		217,800
Fixed cost								(12,000	)									(133,200	)				(145,200	)
Net income							$	60,900									$	11,700				$	72,600

    

Required:

1. Based on budgeted sales, determine the relative sales mix between the two products.

2. Determine the weighted-average contribution margin per unit.

3. Calculate the break-even point in total number of units.

4. Determine the number of units of each product Vernon must sell to break even.

5. Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products.

6. Determine the margin of safety based on the combined sales of the two products.

Answer 1

Answer 1.
	Power	Lite	Total
Sales in Units	270	630	900
Relative Sales Mix	30%	70%	100%
Answer 2.
	Power	Lite	Total
Relative Sales Mix	30%	70%	100%
Contribution Per Unit	$270	$230
Weighted Contribution per Unit	$81	$161	$242
Answer 3.
BEP (In Units) = Fixed Cost / Total Weighted Contribution per Unit
BEP (In Units) = $145200/ $242
BEP (In Units) = 600Units
Sale Mix:
Power - 600 Units X 30%	$180
Lite - 600 Units X 70%	$420
Total Units	$600
Answer 4.
Contribution Format Income Statement
	Power	Lite	Total
Sales in Units	180	420	600
Sales	$1,24,200	$2,43,600	$3,67,800
Less: Variable Costs	$75,600	$1,47,000	$2,22,600
Contribution Margin	$48,600	$96,600	$1,45,200
Fixed Cost			$1,45,200
Net Operating Income			-
Answer 5.Computation of Margin of Safety
Margin of Safety = Sales - Breakeven sales
Margin of Safety = $551700 - $367800
Margin of Safety = $183900