Question

Solomon Company produces two products. Budgeted annual income statements for the two products are provided here:

	Power										Lite										Total
	Budgeted	Per					Budgeted				Budgeted	Per					Budgeted				Budgeted	Budgeted
	Number	Unit					Amount				Number	Unit					Amount				Number	Amount
Sales	170	@	$	760		=	$	129,200			680	@	$	550		=	$	374,000			850	$	503,200
Variable cost	170	@		420		=		(71,400	)		680	@		290		=		(197,200	)		850		(268,600	)
Contribution margin	170	@		340		=		57,800			680	@		260		=		176,800			850		234,600
Fixed cost								(18,000	)									(120,000	)				(138,000	)
Net income							$	39,800									$	56,800				$	96,600

    

Required:

Based on budgeted sales, determine the relative sales mix between the two products.

Determine the weighted-average contribution margin per unit.

Calculate the break-even point in total number of units.

Determine the number of units of each product Solomon must sell to break even.

Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products.

Determine the margin of safety based on the combined sales of the two products.

Answer 1

a. Sales mix:

Power: 170/850 = 20%

Lite: 680/850 = 80%

b.

	Power	Lite	Total
Contribution per unit $	340	260	600
Sales Mix (2 : 8)	2	8	10
Total contribution $	680	2080	2760

Total weighted average contribution per unit = $2760 / 10 = $276

c. Break-even point in total number of units: 500 units

Assume the total volume of sales (units) = X

For break-even: Weighted average contribution per unit x X - Total Fixed costs = Operating income

$276X - $138000 = $0

$276X = $138000

X = $138000/$276 = 500 units

d. Number of break-even units of each product

Power: 500 units x 20% = 100 units

Lite: 500 units x 80% = 400 units

e.

	Power	Lite	Total
Sales	76000	220000	296000
Variable costs	42000	116000	158000
Contribution margin	34000	104000	138000
Fixed cost	18000	120000	138000
Net income (Loss)	16000	-16000	0

f. Margin of safety = Actual sales - Break-even sales = $503200 - $296000 = $207200

Margin of safety % = Margin of safety/Actual sales = $207200/$503200 = 41.2%