Question

Burntt, Inc. produces and sells two products: phones and tablets.

Reinhardt plans to sell 500,000 phones and 100,000 tablets in the coming year. Product price and cost information includes: Phones Tablets Price $850.00 $575.00 Unit Variable Cost $390.00 $250.00 Direct Fixed Cost $335,000 $178,000 Common fixed selling and administrative expenses total $187,600.

Part A What is the sales mix estimated for next year?

Part B Using the sales mix from Part A, determine how many phones and tablets should be sold to break-even.

Part C Prepare a contribution-margin-based income statement for Reinhardt, Inc. based on the unit sales calculated in Part B.

Part D Assume total sales in units are 2,650 in the coming year. What is the margin of safety in units? Explain your answer. Hint: base this on the total number of units, not the breakdown between both products.

Part E Calculate the degree of operating leverage for each product. Assume there are no common fixed expenses. Explain your answer. Hint: if there are no common fixed expenses, the product margin from Part C becomes the operating income.

Answer 1

Part A	Sales mix estmated for next year
	Budgeted sales revenue for Phones	$500,000
	Unit selling price	$850
	Sales quantity	588
	Budgeted sales revenue for tablets	$100,000
	Unit selling price	$575
	Sales quantity	174
	Sales mix
	Phones	588	77%
	Tablet	174	23%
	Total	762
Part B	Phone and tablets to be sold to breakeven
	Direct Fixed Cost for Phones	$335,000
	Direct Fixed Cost for Tablets	$178,000
	Common fixed selling and administrative expenses	$187,600
	Total Fixed Cost	$700,600
	Weighted Average selling price per unit
	Phones($850 x 77%)	$655	$708
	Tablets ($575 x 23%)	$132	96
	Total	$787
	Weighted Average variable cost per unit
	Phones($390 x 77%)	$300
	Tablets ($250 x 23%)	$58
	Total	$358
	Weighted average contribution margin per unit
	Weighted Average selling price per unit	$787
	Weighted Average variable cost per unit	$358
	Weighted average contribution margin per unit	$429
	Break even point = $700600/$429	1633
	Phones(1633 x 77%)	1258
	Tablets (1633 x 23%)	376
Part C	Contribution Margin based Income Statement
		Phone	Tablet	Total
	Sales Unit	1258	376	1633
	Sales Revenue	$1,068,989	$216,003	$1,284,991
	Variable Cost	$490,477	$93,914	$584,391
	Contribution Margin	$578,512	$122,088	$700,600
	Direct Fixed Cost	$335,000	$178,000	$513,000
	Product Margin	$243,512	-$55,912	$187,600
	Common fixed selling and administrative expenses			$187,600
	Net Profit			$0
Part D	Margin of safety
	Margin of safety =(Estimated sales-breakeven sales)/Estimated sales
	=(2085550-1284991)/2085550
	=38.39%
	Margin of safety in dollars = $2085550-$1284991
	= $800559
	Estmated sales (2650 x $787)weighted average selling price	$    2,085,550
Part E	Operating Leverage
	Operating Leverage = Contribution Margin/Net operating income
		Phone	Tablet	Total
	Sales Unit	1258	376	1633
	Sales Revenue	$1,068,989	$216,003	$1,284,991
	Variable Cost	$490,477	$93,914	$584,391
	Contribution Margin	$578,512	$122,088	$700,600
	Direct Fixed Cost	$335,000	$178,000	$513,000
	Product Margin	$243,512	-$55,912	$187,600
	Operating leverage	2.38	-2.18	3.73