Question

Topper Sports, Inc., produces high-quality sports equipment. The company’s Racket Division manufactures three tennis rackets—the Standard, the Deluxe, and the Pro—that are widely used in amateur play. Selected information on the rackets is given below:

  Standard Deluxe Pro

Selling Price per racket	$40.00	$60,00	$90.00
Variable expenses per racket:
Production	$22.00	$27.00	$31.50
Selling (5% of selling price)	$2.00	$3.00	$4.50

All sales are made through the company’s own retail outlets. The Racket Division has the following fixed costs:

	Per Month
Fixed Production costs	$124,000
Advertising expense	104,000
Administrative salaries	54,000
Total	$282,000

Sales, in units, over the past two months have been as follows:

	Standard	Deluxe	Pro	Total
April	2,000	1,000	5,000	8,000
May	8,000	1,000	3,000	12,000

Required:

1-a. Prepare contribution format income statements for April.

1-b. Prepare contribution format income statements for May.

3. Compute the Racket Division’s break-even point in dollar sales for April.

4. Whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix?

5. Assume that sales of the Standard racket increase by $20,400. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $20,400? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Answer 1

1-a

	Standard		Deluxe		Pro		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales Revenue	$         80,000	100.00%	$         60,000	100.00%	$      450,000	100.00%	$      590,000	100.00%
Variable Expenses
Variable Production Costs	$         44,000	55.00%	$         27,000	45.00%	$      157,500	35.00%	$      228,500	38.73%
Sales Commission	$            4,000	5.00%	$            3,000	5.00%	$        22,500	5.00%	$        29,500	5.00%
Total Variable Expenses	$         48,000	60.00%	$         30,000	50.00%	$      180,000	40.00%	$      258,000	43.73%
Contribution Margin	$         32,000	40.00%	$         30,000	50.00%	$      270,000	60.00%	$      332,000	56.27%
Fixed Expenses
Fixed Production Costs							$      124,000	21.02%
Advertising							$      104,000	17.63%
Administrative							$        54,000	9.15%
Total Fixed Expenses							$      282,000	47.80%
Net Operating Income							$        50,000	8.47%

1-b

	Standard		Deluxe		Pro		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales Revenue	$       320,000	100.00%	$         60,000	100.00%	$      270,000	100.00%	$      650,000	100.00%
Variable Expenses
Variable Production Costs	$       176,000	55.00%	$         27,000	45.00%	$        94,500	35.00%	$      297,500	45.77%
Sales Commission	$         16,000	5.00%	$            3,000	5.00%	$        13,500	5.00%	$        32,500	5.00%
Total Variable Expenses	$       192,000	60.00%	$         30,000	50.00%	$      108,000	40.00%	$      330,000	50.77%
Contribution Margin	$       128,000	40.00%	$         30,000	50.00%	$      162,000	60.00%	$      320,000	49.23%
Fixed Expenses
Fixed Production Costs							$      124,000	19.08%
Advertising							$      104,000	16.00%
Administrative							$        54,000	8.31%
Total Fixed Expenses							$      282,000	43.38%
Net Operating Income							$        38,000	5.85%

3. Break even point = Fixed Expenses / Contribution Margin Ratio
= $282000 / 56.27% = $501,155

4.
Break even point will be higher since overall Contribution Margin Ratio decreases due to sale of more Standard product with lower contribution margin ratio.

5.
Increase in Operating Income with increase in Standard sales = $20400 x 40% = $8160
Increase in Operating Income with increase in Pro sales = $20400 x 60% = $12240