Question

Twin Products Company produces and sells two products. Product M sells for $12 and has variable costs of $6. Product W sells for $15 and has variable costs of $10. Twin predicted sales of 25,000 units of M and 20,000 of W. Fixed costs are $60,000 per month. Assume that Twin achieved its sales goal of $600,000 for September, but fell short of its expected operating income of $190,000. Which of the following descriptions best describes the actual results reported of revenue of $600,000 and operating income of less than $190,000?

1. Twin sold 50,000 of M and no product W.

2. Twin sold more of both products M and W than expected.

3. Twin sold more of product W and less of product M than expected. <---------------- answer

d.Twin sold more of product M and less of product W than expected

Can someone help me with this question, please? The answer is choice c ) but I want an explanation of why the answer is C to have a better understanding. Show your work/explanation and thanks in advance!

Answer 1

Correct answer is Twin sold more of product W and less of product M

Justification of answer : - Firstly we will prepare the budgeted income statement to understand the projection .

Budgeted Income statement
	M	W	Total
Sales Units	25000	20000	45000
Sale Price	$            12	$            15
Projected Sales	$ 300,000	$ 300,000	$ 600,000
Variable Cost (M-$6 per unit and W-$10 Per unit)	$ 150,000	$ 200,000	$ 350,000
Contribution Margin	$ 150,000	$ 100,000	$ 250,000
Fixed Cost (allocate equally )			$    60,000
Operating Income			$ 190,000

Contribution margin per unit for product M=$150,000/25000=$6 per unit

Contribution margin per unit for product W =$100,000/20000=$5 per unit

Now , If we assume there is no change in sale price or cost then if we justify the three options given .

a) If sold 50000 M and Zero than operating profit will come more than $190,000 refer below table . So options (a) is wrong

	M	W	Total
Sales Units	50000	0	50000
Sale Price	$            12	$            15
Projected Sales	$ 600,000	$               -	$ 600,000
Variable Cost (M-$6 per unit and W-$10 Per unit)	$ 300,000	$               -	$ 300,000
Contribution Margin	$ 300,000	$               -	$ 300,000
Fixed Cost (allocate equally )			$    60,000
Operating Income			$ 240,000

'

b) Twin sold more of both products M and W than expected ,

This is wrong because if sales increase in both product then profit will increase not decrease .

c) Twin sold more of product W and less of product M than expected

This options is right as here profit only can be reduce when one of the two product's sale will decrease . .

Here , if we compare the contribution margin for both product as calculated above . product M is giving $6 per unit margin and Product W is giving $5 per unit margin . So if we sale less margin product in high volume and high margin product in less volume then profit also will reduce . Please refer below computation , here if assume M product sold 15000 units and W 30000 units then profit is coming below $190000

	M	W	Total
Sales Units	15000	30000	45000
Sale Price	$            12	$            15
Projected Sales	$ 180,000	$ 450,000	$ 630,000
Variable Cost (M-$6 per unit and W-$10 Per unit)	$    90,000	$ 300,000	$ 390,000
Contribution Margin	$    90,000	$ 150,000	$ 240,000
Fixed Cost (allocate equally )			$    60,000
Operating Income			$ 180,000