In: Accounting
On-the-Go, Inc., produces two models of traveling cases for laptop computers—the Programmer and the Executive. The bags have the following characteristics.
Programmer | Executive | |||||
Selling price per bag | $ | 70 | $ | 90 | ||
Variable cost per bag | $ | 30 | $ | 30 | ||
Expected sales (bags) per year | 7,000 | 10,500 | ||||
The total fixed costs per year for the company are $670,000.
Required:
a. What is the anticipated level of profits for the expected sales volumes?
b. Assuming that the product mix is the same at the break-even point, compute the break-even point.
c. If the product sales mix were to change to nine Programmer-style bags for each Executive-style bag, what would be the new break-even volume for On-the-Go?
a.
Programmer | Executive | ||
Sales | $490,000 ($70 * 7,000) | $945,000 ($90 * 10,500) | $1,435,000 |
(-) Variable cost | $210,000 ($30* 7,000) | $315,000 ($30 * 10,500) | $525,000 |
Contribution margin | $280,000 | $630,000 | $910,000 |
(-) Fixed cost | $670,000 | ||
Anticipated profit | $240,000 |
b.
Programmer = 7,000 / (7,000 + 10,500)
= 0.40
Executive = 10,500 / (7,000 + 10,500)
= 0.60
Contribution margin per unit (Programmer) = Selling price - Variable cost
= $70 - $30
= $40
Contribution margin per unit (Executive) = $90 - $30
= $60
Weighted average contribution margin = ($40 * 0.40) + ($60 * 0.60)
= $16 + $36
= $52
Break even point = Fixed costs /Weighted average Contribution margin per unit
= $670,000 / $52
= 12,885 units
c.
Weighted average contribution margin = ($40 * 0.90) + ($60 * 0.10)
= $36 + $6
= $42
Break even point = Fixed costs /Weighted average Contribution margin per unit
= $670,000 / $42
= 15,952 units