Question

Topper Sports, Inc., produces high-quality sports equipment. The company’s Racket Division manufactures three tennis rackets—the Standard, the Deluxe, and the Pro—that are widely used in amateur play. Selected information on the rackets is given below:

	Standard		Deluxe		Pro
Selling price per racket	$	55.00	$	86.00	$	125.00
Variable expenses per racket:
Production	$	33.00	$	43.00	$	45.00
Selling (5% of selling price)	$	2.75	$	4.30	$	6.25

All sales are made through the company’s own retail outlets. The Racket Division has the following fixed costs:

	Per Month
Fixed production costs	$	148,000
Advertising expense		128,000
Administrative salaries		78,000
Total	$	354,000

Sales, in units, over the past two months have been as follows:

	Standard	Deluxe	Pro	Total
April	2,000	1,000	5,000	8,000
May	8,000	1,000	3,000	12,000

Required:

1-a. Prepare contribution format income statements for April.

1-b. Prepare contribution format income statements for May.

3. Compute the Racket Division’s break-even point in dollar sales for April.

4. Whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix?

5. Assume that sales of the Standard racket increase by $22,800. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $22,800? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Answer 1

Ans: Contribution income statement for april:

Standard Delux Pro

Sales 2000* $55= $110000 1000*$86 = $86000 5000*$125 =$ 625000

(-) variable cost 2000*$35.75 = $71500 1000* 47.30 = $47300   5000*$51.25 =$ 256250

Contribution $ 38500 $ 38700 $ 368750

2. Contribution income statement for May is:

  

    Standard Delux Pro

Sales    8000* $55= $440000 1000*$86 = $86000 3000*$125 =$ 375000

(-) variable cost 8000*$35.75= $ 286000 1000* 47.30 =$ 47300 3000*$51.25 =$ 153750

Contribution $ 154000 $ 38700 $ 221250

3. Break even point in dollar sales for april"

fixed cost / average conribution ratio of products

= $ 354000/54.31% = $ 651813.

* RATIO OF PRODUCT SOLD IN APRIL IS 2000: 1000: 5000 = 2:1: 5

AVERAGE CONTRIBUTION RATIO = TOTAL CONTRIBUTIO/TOTAL SALES* 100

= (38500 + 38700 + 368750) / (110000 + 86000 + 625000) *100

= 54.31%

4. Break even point in dollar sales for May is:

fixed cost / average conribution ratio of products

= $354000/ 45.94%

= $ 770570

AVERAGE CONTRIBUTION RATIO = TOTAL CONTRIBUTIO/TOTAL SALES* 100

= ( 154000 + 38700+ 221250) / (440000+ 86000 + 375000)* 100

= 45.94%

5. Contribution per unit for standard is: $ 55- $ 35.75 = $ 19.25

Contribution ratio is 19.25/55*100 = 35%

So if standard racket sales increases by $ 22800 , effect on net operating would be increased by 35% of 22800

= $ 7980

Contribution per unit for Pro is: $125- $ 51.25 = $ 73.75

Contribution ratio is 73.75/125*100 = 59%

So if Pro racket sales increases by $ 22800 , effect on net operating would be increased by 59% of 22800

= $ 13452