Question

Tabulation Corporation manufactures and sells two types of electronic calculators: EL-520 W and EL-620 T. The following data was gathered from last month’s activities:

                                                                                  EL-520 W          EL-620 T

Sales in units                                                              5,000                3,000

Selling price per unit                                                   $50                  $100

Variable production costs per unit                               $10                  $26

Traceable fixed production costs                                 $100,000          $150,000

Variable selling expenses per unit                                $5                    $6

Traceable fixed selling expenses                                  $5,000              $7,500

Allocated division administrative expenses                  $50,000            $60,000

Required:

1. Prepare a segmented income statement in the contribution format for last month, showing both "Amount" and "Percent" columns for the company as a whole and for each model.
2. Why might it be very difficult to calculate separate break-even sales for each model?
3. Refer to the original data and, if necessary, the results of the segmented income statement prepared in part (1) above. Calculate the total break-even sales (in both units AND dollars) for last month, assuming that none of the fixed production costs and fixed selling expenses is traceable. Allocate the total break-even sales between the two models.
4. Again, refer to the original data and, if necessary, the results of the segmented income statement prepared in part (1) above. Calculate the total break-even sales (in both units AND dollars) for last month, assuming that the "allocated" amounts of the company's administrative expenses are actually traceable. Allocate the total break-even sales between the two models.
5. How reasonable are the total break-even sales numbers calculated in parts (3) and (4) given the actual results for last month?

Answer 1

1. Segment income statement of Tabulation corporation is as follows:-

Particular	EL-520W	Percentage	EL-620T	Percentage	Overall Company	Percentage
Sales	250000	100.0%	300000	100.0%	550000	100.0%
Variable costs
#Production cost	50000	20.0%	78000	26.0%	128000	23.3%
# Selling and administrative	25000	10.0%	18000	6.0%	43000	7.8%
Total variable costs	75000	30.0%	96000	32.0%	171000	31.1%
Contribution margin	175000	70.0%	204000	68.0%	379000	68.9%
Fixed Costs
#Production cost	100000	40.0%	150000	50.0%	250000	45.5%
# Selling cost	5000	2.0%	7500	2.5%	12500	2.3%
# Allocated administrative	50000	20.0%	60000	20.0%	110000	20.0%
Total fixed costs	155000	62.0%	217500	72.5%	372500	67.7%
Net Income	20000	8.0%	-13500	-4.5%	6500	1.2%

2. Correct breakeven sales calculation cannot be determined as administrative expenses are allocated and are not separately related to each product which will result in calculation of inappropriate break even sales.

3. Breakeven units = Fixed costs / Contribution per unit

i.e. 372500/47.375 = 7852 units

Break even sales = Fixed costs / Contribution %

i.e. =372500/68.9%

Break even sales =540560

Calculations:-

Total units sold = 5000+3000=8000 units

Contribution per unit = contribution/ units sold = 379000/8000=47.375

The allocation cannot be done on assumption basis as specific base for allocation of fixed costs is not traceable(assumed)

4. If fixed costs are traceable:-

Particular	EL-520W	EL-620T	Overall Company
Break even units	4429 units	3199 units	7628 units
(Fixed cost /Contribution per unit)	155000/(50-10-5)	217500/(100-26-6)
Break even Sales	$     221,429	$       319,853	$ 541,282
(Fixed cost /Contribution %)	155000/0.7	217500/0.68