Question

X-Cee-Ski Company recently expanded its manufacturing capacity, which will allow it to produce up to 21,000 pairs of cross-country skis of the mountaineering model or the touring model. The Sales Department assures management that it can sell between 9,000 and 14,000 pairs of either product this year. Because the models are very similar, X-Cee-Ski will produce only one of the two models.

The following information was compiled by the Accounting Department:

	Per-Unit (Pair) Data
		Mountaineering		Touring
Selling price		$180		$120
Variable costs		130		90

Fixed costs will total $320,000 if the mountaineering model is produced but will be only $220,000 if the touring model is produced. X-Cee-Ski is subject to a 40 percent income tax rate.

Required:

1. If X-Cee-Ski Company desires an after-tax net income of $48,000, how many pairs of touring model skis will the company have to sell?
pairs of touring skis

2. Suppose that X-Cee-Ski Company decided to produce only one model of skis. What is the total sales revenue at which X-Cee-Ski Company would make the same profit or loss regardless of the ski model it decided to produce?
$

3. If the Sales Department could guarantee the annual sale of 12,000 pairs of either model, which model would the company produce? (CMA adapted)
Mountaineering model

Feedback

1. See Cornerstone 16.4.

2. Determine operating income formulas for each ski model, set them equal to one another and solve for X (units)

3. Use the number of pairs given for X in the operating income formula for each model

Answer 1

1. If X-Cee-Ski Company desires an after-tax net income of $48,000,
How many pairs of Touring model skis will the company have to sell ?
Desired profit before tax (48000/(100%-40%)	80000
Desired profit before tax	80000
ADD: Fixed Cost	220000
Total contribution required	300000
Divided by Contribution per Unit (120-90)	30
PAIRS OF TOURING SKIS	10000
2. Suppose that X-Cee-Ski Company decided to produce only one model of skis.
What is the total sales revenue at which X-Cee-Ski Company would make the
Same profit or loss regardless of the ski model it decided to produce?
	Mountaineering	Touring	Difference
Selling Price	180	120	60
LESS : Variable Cost	130	90	40
Contribution per unit	50	30	20
Fixed Cost	320000	220000	100000
Contribution Margin Ratio(Contribution per unit/selling price)	27.78%	25.00%	2.78%
Fixed Cost			100000
Divided by Contribution margin ratio			2.78%
X-cee ski Company would make the same profit or loss regardless of the ski model
it Decided to produce
	Mountaineering	Touring	Difference
Selling Price	180	120	60
LESS : Variable Cost	130	90	40
Contribution per unit	50	30	20
Fixed Cost	320000	220000	100000
Contribution Margin Ratio(Contribution per unit/selling price)	27.78%	25.00%	2.78%
Fixed Cost			100000
Divided by Contribution margin ratio			2.78%
TOTAL SALE REVENUE REGARDLESS OF MODEL			3600000
Proof of answer
	Mountaineering	Touring
Sales	360000	360000
Multiplied by : Contribution Margin Ratio	28%	25%
Total Contribution	1000000	900000
Less : Fixed Cost	320000	220000
Net Operating Income	680000	680000
Less : Tax Exp @40%	272000	272000
Net profit	408000	408000
SAME PROFIT UNDER BOTH MODEL
3. If the Sales Department could guarantee the annual sale of 12,000
pairs of either model, which model would the company produce?
	Mountaineering	Touring
Selling Price	180	120
LESS : Variable Cost	130	90
Contribution per unit	50	30
Total Contribution (12000* contribution per unit)	600000	360000
Fixed Cost	320000	220000
Net Operating Income	2,80,000	140000
Better Model is Mountaineering which gives Higher profit