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.

2. The company has developed a new product called Samoan Delight that sells for $50 each and that has variable expenses of $30 per unit. If the company can sell 12,000 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.

2A.

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

2B

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

Answer 1

2(a) --

Island Novelties Inc.
Contribution Income Statement
	Hawaiian Fantasy		Tahitian Joy		Samoan Delight		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales (Units sold x Unit Selling Price)	$680,000	100%	$720,000	100%	$600,000	100%	$2,000,000	100%
Variable Expenses (Units sold x Unit Variable Cost)	$442,000	65%	$216,000	30%	$360,000	60%	$1,018,000	50.9%
Contribution Margin	$238,000	35%	$504,000	70%	$240,000	40%	$982,000	49.1%
Fixed Expenses							$651,900
Net Operating Income							$330,100

2(b) –

Break Even Point in dollar sales	For Company
Total Fixed Expenses	$651,900
Contribution Margin Ratio for Company	49.1%
Break Even Point in dollars (Total Fixed Expenses / Contribution Margin Ratio)	$1,327,698.574
Margin of Safety in dollars and in Percentage (For Company)
Total Sales	$2,000,000
Break Even Sales in dollars (as calculated in part b)	$1,327,699
Margin of safety in dollars (Sales - Break Even Sales)	$672,301
Margin of Safety in percentage (Margin of Safety in dollars / Sales x 100)	33.62%