Question

AV 2000 Inc. has developed a laser disc and a compact disc which have become popular among young adults. Last year's cost and operating data for the two audio-visual products are presented below:

                                                                        ______Per Unit_______

                                                                        Laser               Compact

                                                                        Disc                   Disc

Selling price……………………………….   $50                    $10

Contribution Margin ratio………………..    60%                   20%

                                                                        ______Per Year_______

Sales volume in units…………………….     5,000                 15,000

Fixed costs……………...………………..               $99,000

Required:

1.         Prepare last year's contribution income statement showing both amount and percent columns for each product and for the company as a whole.

2.         Compute the company’s break-even point in dollars using the company's overall CM ratio.

3.         Compute each product break-even point in dollars and in units based on the company’s overall CM ratio. Specify amount and units for each product.

Answer 1

Correct Answer:

Requirement 1:

Sales Revenue
Laser Disc (5000 units *$ 50)	$ 250,000.00
Compact Disc (15000*$10)	$ 150,000.00
Total sales revenue		$ 400,000.00
Less: Variable cost
Laser Disc ( 5000 * $ 30)	$ 150,000.00
Compact Disc ( 15000 * $ 2)	$ 30,000.00
Total Variable cost		$ 180,000.00
Contribution margin		$ 220,000.00
Less: Fixed Cost		$ 99,000.00
Net income		$ 121,000.00

Requirement 2:

No. of Units to break Even

9,000 units

Working:

		Laser Disc	Compact Disc
A	Sales Price	$ 50.00	$ 10.00
B	Contribution margin ratio	60%	20%
A*B	variable cost	$ 30.00	$ 2.00

	Laser Disc	Compact Disc
Ticket price	$ 50.00	$ 10.00
(-) Variable cost	$ 30.00	$ 2.00
Contribution margin per passenger	$ 20.00	$ 8.00
Sales Mix %	25%	75%
Weighted average contribution margin	$ 5.00	$ 6.00

Total Fixed cost		$                                 99,000.00
Total Weighted average contribution margin	[6 + 5]	$                                         11.00
No. of Units to break Even		9000 Units

Requirement 3:

No. of Units to break Even	[calculated above]	9,000 Units
Laser Disc at Break Even	[9000 x 25%]	2,250 Units
Compact Disc at Break Even	[9000 x 75%]	6,750 Units

Break even points in sales dollars
Laser Disc ( 2250 *$ 50)	$ 112,500.00
Compact Disc (6750 *$ 10)	$ 67,500.00
Total		$ 180,000.00

End of answer.

Thanks.