Question

In: Accounting

Parker Pottery produces a line of vases and a line of ceramic figurines. Each line uses...

Parker Pottery produces a line of vases and a line of ceramic figurines. Each line uses the same equipment and labor; hence, there are no traceable fixed costs. Common fixed cost equals $30,000. Parker's accountant has begun to assess the profitability of the two lines and has gathered the following data for last year:

Vases Figurines
Price $40 $70
Variable cost 30 42
Contribution margin $10 $28
Number of units 1,000 500

Required:

1. Compute the number of vases and the number of figurines that must be sold for the company to break even.

Break-even vases units
Break-even figurines units

2. Parker Pottery is considering upgrading its factory to improve the quality of its products. The upgrade will add $5,260 per year to total fixed cost. If the upgrade is successful, the projected sales of vases will be 1,500, and figurine sales will increase to 1,000 units. What is the new break-even point in units for each of the products?

Break-even vases units
Break-even figurines units

Solutions

Expert Solution

Answer 1.

Sales Mix = 1,000 : 500
Sales Mix = 2 : 1

Weighted Average Contribution Margin per unit = (2/3) * $10 + (1/3) * $28
Weighted Average Contribution Margin per unit = $16

Overall Breakeven Point in units = Overall Fixed Costs / Weighted Average Contribution Margin per unit
Overall Breakeven Point in units = $30,000 / $16
Overall Breakeven Point in units = 1,875

Breakeven Point in units for Vases = 1,875 * (2/3)
Breakeven Point in units for Vases = 1,250

Breakeven Point in units for Figurines = 1,875 * (2/3)
Breakeven Point in units for Figurines = 625

Answer 2.

Overall Fixed Costs = $30,000 + $5,260
Overall Fixed Costs = $35,260

Sales Mix = 1,500 : 1,000
Sales Mix = 3 : 2

Weighted Average Contribution Margin per unit = (3/5) * $10 + (2/5) * $28
Weighted Average Contribution Margin per unit = $17.20

Overall Breakeven Point in units = Overall Fixed Costs / Weighted Average Contribution Margin per unit
Overall Breakeven Point in units = $35,260 / $17.20
Overall Breakeven Point in units = 2,050

Breakeven Point in units for Vases = 2,050 * (3/5)
Breakeven Point in units for Vases = 1,230

Breakeven Point in units for Figurines = 2,050 * (2/5)
Breakeven Point in units for Figurines = 820

ekkarill92 answered 2 years ago
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