Question

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	$	60		$	90
Variable cost per bag	$	30		$	30
Expected sales (bags) per year		8,000			12,000

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?

Answer 1

a.

	Programmer	Executive
Sales	$480,000($60 * 8,000)	$1,080,000($90 * 12,000)	$1,560,000
Less: Variable cost	$240,000($30 * 8,000)	$360,000($30 * 12,000)	$600,000
Contribution margin	$240,000	$720,000	$960,000
Less: Fixed costs			$670,000
Anticipated profit			$290,000

b.

Programmer (Sales mix) = 8,000 units / (8,000 + 12,000) units

= 0.40

Executive (Sales mix) = 12,000 / (8,000 + 12,000) units

= 0.60

Contribution margin per unit (Programmer) = Selling price - Variable cost

= $60 - $30

= $30

Contribution margin per unit (Executive) = $90 - $30

= $60

Weighted average contribution margin = ($30 * 0.40) + ($60 * 0.60)

= $12 + $36

= $48

Break even point = Fixed costs /Weighted average Contribution margin per unit

= $670,000 / $48

= 13,958 units

c.

Weighted average contribution margin = ($30 * 0.90) + ($60 * 0.10)

= $27 + $6

= $33

Break even point = Fixed costs /Weighted average Contribution margin per unit

= $670,000 / $33

= 20,303 units