Question

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	$	20		$	100
Variable expense per unit	$	13		$	30
Number of units sold annually		34,000			7,200

Fixed expenses total $651,900 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.

1A.

Island Novelties, Inc., Contribution Income Statement Hawaiian Fantasy Tahitian Joy Total Amount % Amount % Amount % % % % % % % % % %

1B.

Break-even point in dollar sales
Margin of safety in dollars
Margin of safety percentage		%

Answer 1

• All working forms part of the answer
• Requirement 1

Contribution Income Statement
	Hawaiian Fantasy		Tahitian Joy		Total
	Amount	%	Amount	%	Amount	%
Sales revenue	$          680,000.00	100%	$        720,000.00	100%	$      1,400,000.00	100%
Variable Cost	$          442,000.00	65%	$        216,000.00	30%	$          658,000.00	47%
Contribution margin	$          238,000.00	35%	$        504,000.00	70%	$          742,000.00	53%
Fixed Cost					$          651,900.00
Net Income					$            90,100.00

• Requirement 2

A	Fixed Cost	$          651,900.00
B	Total CM Ratio	53%
C = A/B	Break Even in Sales Dollars	$      1,230,000.00
D	Total Sales Revenue	$      1,400,000.00
E = D - C	Margin of Safety in Sales dollars	$          170,000.00
F = (E/D) x 100	Margin of Safety %	12%