In: Accounting
Critical Thinking Example
Island
Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and
Tahitian...
Critical Thinking Example
Island
Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and
Tahitian Joy. Present revenue, cost, and sales data on the two
products follow:
Hawaiian Fantasy Tahitian
Joy
Selling price per
unit
$15
$100
Variable expenses per
unit
9
20
Number of units sold annually
20,000
5,000
Fixed expenses total $475,800 per year. The Republic of Palau
uses the U.S. dollar as its currency.
REQUIRED
- Assuming the sales mix given above, do the following:
- Prepare a contribution income statement showing both dollar and
percent columns for each product and for the company as a
whole.
- Compute the break-even point in dollars for the company as a
whole and the margin of safety in both dollars and percent.
- Another product, Samoan Delight, has just come onto the market.
Assume that the company could sell 10,000 units at $45 each. The
variable expenses would be $36 each. The company's fixed expenses
would not change.
- Prepare another contribution income statement, including sales
of the Samoan Delight (sales of the other two products would not
change). Carry percentage computations to one decimal place.
- Compute the company’s new break-even point in dollars and the
new margin of safety in both dollars and percent.
- The president of the company examines your figures and says,
“There’s something strange here. Our fixed costs haven’t changed
and you show greater total contribution margin if we add the new
product, but you also show our break-even point going up. With
greater contribution margin, the break-even point should go down,
not up. You’ve made a mistake somewhere.” Explain to the president
what has happened.