Question

Collegiate Canvas Co. currently makes and sells two models of a backpack. Data applicable to the current operation are summarized in the following columns labeled Current Operation. Management is considering adding a Value model to its current Luxury and Economy models. Expected data if the new model is added are shown in the following columns labeled Proposed Expansion:

	Current Operation							Proposed Expansion
	Luxury			Economy				Luxury			Economy			Value
Selling price per unit	$	23		$	15			$	23		$	15		$	15
Variable expenses per unit		9.2			7.5				9.2			7.5			8.5
Annual sales volume-units		10,500			20,500				6,500			18,500			8,000
Fixed expenses for year	Total of $74,000							Total of $83,000

Required:

a. Calculate the company's current total contribution margin and the current average contribution margin ratio.

b. Calculate the company’s current amount of operating income.

c. Calculate the company's current break-even point in dollar sales. (Do not round intermediate calculations.)

d. State why the company might incur a loss, even if the sales amount calculated in part c was achieved and selling prices and costs didn't change.

	Because sales mix might change.
	Because of increase in tax sale.
	Because fixed cost might exceed total contribution.

e. Calculate the company's total operating income under the proposed expansion.

f. Based on the proposed expansion data, would you recommend adding the Value model?

	No
	Yes

g. Would your answer to part f change if the Value model sales volume were to increase to 8,400 units annually and all other data remained the same?

	No
	Yes

Answer 1

a) Income Statement ;-

Particulars	Luxury	Economy	Total
Sales Volume (a)	10500	20500
Selling Price Per Unit	$23	$15
Less : Variable Cost Per Unit	($9.2)	($7.5)
Contribution Per Unit (b)	$13.8	$7.5
Contribution Margin in Dollar (a*b)	$144900	$153750	$298650
Less : Fixed Cost			($74000)
Operating Income			$224650

Total Contribution Margin = $298650

Average Contribution Margin Ratio = $298650 / (($23*10500)+($15*20500))

= $298650 / $549000

= 54.4%

b) Operating Income = Contribution - Fixed Cost

= $298650 - $74000

= $224650

c) Break Even Point in Dollar Sales :-

= Fixed Cost / Comtibution Margin Ratio

= $74000 / 54.4%

= $136029

d) The Company might incur a loss, Because Sales Mix might Change.

e) Income Statement ;-

Particulars	Luxury	Economy	Value	Total
Sales (Selling Price * Sales Volume)	$149500	$277500	$120000	$547000
Less : Variable Cost (Variable Cost * Sales Volume)	$59800	$138750	$68000	($266550)
Contribution Margin	$89700	$138750	$52000	$280450
Less : Fixed Cost				($83000)
Operating Income				$197450

f. No, Because Operating Income Reduce by $27200. ($224650-$197450)

g. No, Because Increase Operating Income by $2600 ($6.5*400). But Operating Income Reduce by $27200 after add Value Model.