Question

In: Accounting

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price,...

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows:

Hawaiian Fantasy Tahitian Joy
Selling price per unit $ 25 $ 120
Variable expense per unit $ 15 $ 42
Number of units sold annually 14,000 7,500

Fixed expenses total $580,000 per year.

Required:

1. Assuming the sales mix given above, do the following:

a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.

2. The company has developed a new product called Samoan Delight that sells for $50 each and that has variable expenses of $40 per unit. If the company can sell 13,000 units of Samoan Delight without incurring any additional fixed expenses:

a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.

b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.

Solutions

Expert Solution

Solution 1a:

Contribution margin income statement
Particulars Hawaiian Fantasy Tahitian Joy Total
Amount % Amount % Amount %
Sales $350,000.00 100.00% $900,000.00 100.00% $1,250,000.00 100%
Variable Costs $210,000.00 60.00% $315,000.00 35.00% $525,000.00 42%
Contribution margin $140,000.00 40.00% $585,000.00 65.00% $725,000.00 58%
Fixed Expenses $580,000.00
Net Operating income $145,000.00

Solution 1b:

Breakeven point in dollar sales = Fixed expenses / Weighted average contribution margin ratio = $580,000 / 58% =$1,000,000

Margin of safety in dollar = Current sales - Breakeven sales = $1,250,000 - $1,000,000 = $250,000

Margin of safety in percentage = (Current sales - Breakeven sales) / Current sales = ($1,250,000 - $1,000,000) / $1,250,000 = 20%

Solution 2a:

Contribution margin income statement
Particulars Hawaiian Fantasy Tahitian Joy Samon Delight Total
Amount % Amount % Amount % Amount %
Sales $350,000.00 100.00% $900,000.00 100.00% $650,000.00 100.00% $1,900,000.00 100%
Variable Costs $210,000.00 60.00% $315,000.00 35.00% $520,000.00 80.00% $1,045,000.00 55%
Contribution margin $140,000.00 40.00% $585,000.00 65.00% $130,000.00 20.00% $855,000.00 45%
Fixed Expenses $580,000.00
Net Operating income $275,000.00

Solution 2b:

Revised breakeven point in dollar sales = Fixed expenses / weighted average contribution margin ratio = $580,000 / 45% = $1,288,889

Revised margin of safety in dollar = Current sales - Breakeven sales = $1,900,000 - $1,288,889 = $611,111

Margin of safety percentage = (Current sales - Breakeven sales) / Current sales

= $611,111 / $1,900,000 = 32.16%


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