Question

In: Accounting

On-the-Go, Inc., produces two models of traveling cases for laptop computers—the Programmer and the Executive. The...

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?

Solutions

Expert Solution

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


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