Question

On-the-Go, Inc., produces two models of traveling cases for laptop computers—the Programmer and the Executive. The bags have the following characteristics.

Programmer Executive

Selling price per bag $ 60 $ 90

Variable cost per bag $30 $ 30

Expected sales (bags) per year 7,000 10,500

The total fixed costs per year for the company are $664,000.

Required: a. What is the anticipated level of profits for the expected sales volumes?

b. Assuming that the product mix is the same at the break-even point, compute the break-even point.

c. If the product sales mix were to change to nine Programmer-style bags for each Executive-style bag, what would be the new break-even volume for On-the-Go?

Answer 1

a.

	Programmer	Executive	Total
Sales	(7,000 * $60) $420,000	(10,500 * $90) $945,000
(-) Variable costs	(7,000 * $30) $210,000	(10,500 * $30) $315,000
Contribution Margin	$210,000	$630,000	$840,000
(-) Fixed costs			$664,000
Profits			$176,000

b.

Contrinution margin per unit for Programmer = Sales - variable costs

= $60 - $30

= $30

Contrinution margin per unit for Executive = Sales - variable costs

= $90 - $30

= $60

Weighted average contribution margin = (7,000 / 17,500) * Contrinution margin per unit for Programmer + (10,500 / 17,500) * Contrinution margin per unit for Executive

= (7,000 / 17,500) * $30 + (10,500 / 17,500) * $60

= 0.40 * $30 + 0.60 * $60

= $12 + $36

= $48

Break even point = Fixed costs / Weighted average contribution margin

= $664,000 / $48

= 13,833 units

Break even point

Programmer = 0.40 * 13,833

= 5,533 units

Executive = 0.60 * 13,833

= 8,300 units

c.

Weighted average contribution margin = 0.90* Contrinution margin per unit for Programmer + 0.10 * Contrinution margin per unit for Executive

= 0.90 * $30 + 0.10 * $60

= $27 + $6

= $33

Break even point = Fixed costs / Weighted average contribution margin

= $664,000 / $33

= 20,121 units

Break even point

Programmer = 0.90 * 20,121

= 18,109

Executive = 0.10 * 20,121

= 2,012