Question

Break-Even Point and Target Profit Measured in Sales Dollars (Multiple Products). Hi-Tech Incorporated produces two different products with the following monthly data (these data are the same as the previous exercise).

	Cell	GPS	Total
Selling price per unit	$100	$400
Variable cost per unit	$  40	$240
Expected unit sales	21,000	9,000	30,000
Sales mix	70 percent	30 percent	100 percent
Fixed costs			$1,800,000

Assume the sales mix remains the same at all levels of sales.

Required:

Round your answers to the nearest hundredth of a percent and nearest dollar where appropriate. (An example for percentage calculations is 0.434532 = 0.4345 = 43.45 percent; an example for dollar calculations is $378.9787 = $379.)

Using the information provided, prepare a contribution margin income statement for the month similar to the one in Figure 6.5 "Income Statement for Amy’s Accounting Service".

Calculate the weighted average contribution margin ratio.

Find the break-even point in sales dollars.

What amount of sales dollars is required to earn a monthly profit of $540,000?

Assume the contribution margin income statement prepared in requirement a is the company’s base case. What is the margin of safety in sales dollars?

Answer 1

• All working forms part of the answer
• Contribution margin income statement

	Cell	GPS	Total
Sales Revenue	$     2,100,000.00	$    3,600,000.00	$ 5,700,000.00
Variable cost	$        840,000.00	$    2,160,000.00	$ 3,000,000.00
Contribution margin	$     1,260,000.00	$    1,440,000.00	$ 2,700,000.00
Fixed Cost			$ 1,800,000.00
Net Operating Income			$      900,000.00

• Weighted average contribution margin ratio

Working		Cell	GPS
A	Contribution margin	$     1,260,000.00	$    1,440,000.00
B	Sales Revenue	$     2,100,000.00	$    3,600,000.00
C = A/B	Contribution margin ratio	60%	40%
D	Sales Mix	70%	30%
E = C x D	Weighted Average contribution margin	42%	12%

Weighted average contribution margin = 42% + 12% = 54%

• Break even Sales dollars

A	Tota Fixed Cost	$           1,800,000
B	Weighted Average contribution margin ratio	54%
C = A/B	Break Even point in Sales Dollars	$           3,333,333

• Sales required to earn target profits

A	Target monthly profit	$              540,000
B	Fixed cost	$           1,800,000
C = A+B	Total contribution margin required	$           2,340,000
D	Weighted Average contribution margin ratio	54%
E = C/D	Sales Dollars required to earn monthly profit of $ 540,000	$          4,333,333

• Margin of Safety

A	Total Sales revenue	$           5,700,000
B	Break Even sales dollars	$           3,333,333
C = A - B	Margin of Safety in sales dollars	$           2,366,667