Question

Lindstrom Company produces two fountain pen models. Information about its products follows:

	Product A			Product B
Sales revenue	$	120,000		$	125,000
Less: Variable costs		60,000			66,000
Contribution margin	$	60,000		$	59,000
Total units sold		7,000			7,000

Lindstrom’s fixed costs total $84,500.

Required:
1. Determine Lindstrom’s weighted-average unit contribution margin and weighted-average contribution margin ratio. (Round your weighted-average CM to 2 decimal places and your CM ratio to 1 decimal place (i.e. .123 should be entered as 12.3%)).



2. Calculate Lindstrom’s break-even point in units and in sales revenue. (Round your "Sales Revenue" answer to 2 decimal places and "Sales Units" answer to the nearest whole number.)


    
3. Calculate the number of units that Lindstrom must sell to earn a $120,000 profit. (Round your answer to the nearest whole number.)


    
4. Calculate Lindstrom’s margin of safety and margin of safety as a percentage of sales if it sells 11,000 total pens. (Round your margin of safety in units to the nearest whole number and your percentage of sales answer to 2 decimal places (i.e. .1234 should be entered as 12.34%))

Answer 1

Solution:
1.	Weighted-average unit contribution margin =$8.5 per unit
	Weighted-average contribution margin ratio =48.6%
Working Notes:
	Weighted-average unit contribution margin =Total contribution margin of all products/Total units for all products
		=119,000/14,000
		=$8.5 per unit
	Weighted-average contribution margin ratio =Total contribution margin of all products/Total SALES for all products
		=119,000/245,000
		=0.48571428
		=48.57%
		=48.6%
Notes:		i	II	III=I+II
		Product A	Product B	Total
	Sales revenue	120,000	125,000	245,000	a
	Less: Variable costs	60,000	66,000	126,000	b
	Contribution margin	60,000	59,000	119,000	c=a-b
	Total units sold	7,000	7,000	14,000	d
2.	Break-even point in units =9,941 units
	Break-even point in sales revenue =$173,970.59
Working Notes:
	Breakeven point = Fixed cost /unit contribution margin
	=$84,500/$8.50	$8.50 unit contribution margin used from 1.
	=9,941.176
	=9,941 units
	Break-even point in sales revenue = Fixed cost /Contribution margin ratio
		=$84,500/0.48571428
		=$173,970.5903	contribution margin ratio = 0.48571428 from 1.
		=$173,970.59
3.	Number of units that Lindstrom must sell to earn a $120,000 profit = 24,059units
Working Notes:
	Target units=(Total fixed cost + target profit) / Unit Contribution Margin
	= (84,500 + 120,000)/8.50
	= 204,500/8.50
	=24,058.823
	=24,059 units	nearest whole no.
4.	Margin of safety = 1,059 units
	margin of safety as a percentage of sales=9.63%
Working Notes:
	Margin of safety units= Actual or budgeted sales - Break even sales
	=11,000 -9,941.176
	=1,058.824
	=1,059	nearest whole no.
	Margin of safety as a percentage of sales=Margin of safety in units/Total sales units
		= 1,058.824/11,000
		=0.096256727
		=0.0963
		=9.63%
Please feel free to ask if anything about above solution in comment section of the question.