Question

Warm Hands, a small company based in Prince Edward Island, manufactures and sells two types of lightweight gloves for runners—Warm and Cozy. Current revenue, cost, and unit sales data for the two products appear below:

	Warm			Cozy
Selling price per pair	$	6.00		$	9.00
Variable expenses per pair	$	1.50		$	4.50
Number of pairs sold monthly		3,000	units		1,000	units

Fixed expenses are $2,880 per month.

Required:

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

a. Prepare a contribution format income statement showing both dollars and percentage columns for each product and for the company as a whole. (Round percentage answers to 2 decimal places.)

b. Compute the break-even point in dollars for the company as a whole and the margin of safety in both dollars and percentage of sales. (Do not round your intermediate calculations. Round percentage answer to 2 decimal places.)

c. Compute the break-even point in units for the company as a whole and the margin of safety in both units (pairs of gloves) and percentage of sales. (Round percentage answer to 2 decimal places.)

d. Compute how many pairs of gloves must be sold overall if the company wants to make an after-tax target profit of $6,300 and the tax rate is 30%. Assume that the sales mix remains the same as shown above.

2. The company has developed another type of gloves that provide better protection in extreme cold, Toasty, which the company plans to sell for $17.00 per pair. At this price, the company expects to sell 1,000 pairs per month of the product. The variable expense would be $13.60 per pair. The company’s fixed expenses would not change.

a. Prepare another contribution format income statement, including sales of Toasty (sales of the other two products would not change). (Round percentage answers to 2 decimal places.)

b. Compute the company’s new break-even point in dollars for the company as a whole and the new margin of safety in both dollars and percentage of sales. (Round your break-even sales to the nearest whole dollar amount and percentage answer to 2 decimal places.)

Answer 1

Contribution format Income Statement
	Warm	Cozy	Total
	Amount	%	Amount	%	Amount	%
Sales	18000	100.00%	9000	100.00%	27000	100%
Less:Variable Expenses	4500	25.00%	4500	50.00%	9000	33.33%
Contribution Margin	13500	75.00%	4500	50.00%	18000	66.67%
Less:Fixed Expenses					2880
Net Operating Income					15120
Break even point in dollar sales = Fixed costs/Contribution margin ratio
2880/66.67% =4320
Break even point in unit sales = Fixed costs/Weighted average contribution margin (Working note) =2880/4.5 = 640
Margin of safety = Sales - Break even Sales [27000 - 4320]	22680
in % = Margin of Safety in Dollars/Sales (22680/27000) x 100	84.00%
d.Sales in Units = (Desired Income before tax + fixed costs)/Contribution Margin per unit
=(6300/0.7 + 2880)/6
1980
2.
Contribution format Income Statement
	Warm	Cozy	Toasty	Total
	Amount	%	Amount	%	Amount	%	Amount
Sales	18000	100.00%	9000	100.00%	17000	100.00%	44000
Less:Variable Expenses	4500	25.00%	4500	50.00%	13600	80.00%	22600
Contribution Margin	13500	75.00%	4500	50.00%	3400	20.00%	21400
Less:Fixed Expenses							2880
Net Operating Income							18520
Break even point in dollar sales = fixed cost/contribution margin ratio =2880/20 = 14400	14400
Margin of safety= sales - Break even Sales =17000 - 14400	2600
in %	15.29%

Working note:

	Warm	Cozy	Total
		%		%
Sales	$6	100%	$9	100%
Variable expenses	$1.5	25%	$4.5	50%
Contribution margin - A	$4.5	75%	$4.5	50%
Sales units	3000		1000
Selling price per units	$6		$9
Total sales	$18000		$9000		$27000
Sales mix - B	66.67%		33.33%		100%
Weighted average contribution - (A x B)	$3		$1.5		$4.5

Please rate, thanks.