Question

Warm Hands, a small company based in Prince Edward Island, manufactures and sells two types of lightweight gloves for runners—Warm and Cozy. Current revenue, cost, and unit sales data for the two products appear below:

	Warm			Cozy
Selling price per pair	$	10.00		$	15.00
Variable expenses per pair	$	2.50		$	7.50
Number of pairs sold monthly		2,100	units		700	units

Fixed expenses are $2,520 per month.

Required:

1. Assuming the sales mix above, do the following:

a. Prepare a contribution format income statement showing both dollars and percentage columns for each product and for the company as a whole. (Round percentage answers to 2 decimal places.)

b. Compute the break-even point in dollars for the company as a whole and the margin of safety in both dollars and percentage of sales. (Do not round your intermediate calculations. Round percentage answer to 2 decimal places.)

c. Compute the break-even point in units for the company as a whole and the margin of safety in both units (pairs of gloves) and percentage of sales. (Round percentage answer to 2 decimal places.)

d. Compute how many pairs of gloves must be sold overall if the company wants to make an after-tax target profit of $10,500 and the tax rate is 30%. Assume that the sales mix remains the same as shown above.

2. The company has developed another type of gloves that provide better protection in extreme cold, Toasty, which the company plans to sell for $23.00 per pair. At this price, the company expects to sell 700 pairs per month of the product. The variable expense would be $18.40 per pair. The company’s fixed expenses would not change.

a. Prepare another contribution format income statement, including sales of Toasty (sales of the other two products would not change). (Round percentage answers to 2 decimal places.)

b. Compute the company’s new break-even point in dollars for the company as a whole and the new margin of safety in both dollars and percentage of sales. (Round your break-even sales to the nearest whole dollar amount and percentage answer to 2 decimal places.)

Answer 1

Solution

1)

A)

Contribution format Income Statement Warm Cozy Total Amount % Amount % Amount % Sales 21,000 100.00% 10,500 100.00% 31,500 100.00% Variable Expenses 5,250 25.00% 5,250 50.00% 10,500 33.33% Contribution Margin 15,750 75.00% 5,250 50.00% 21,000 66.67% Fixed Expenses 1680 840 2,520 Net Operating Income 14,070 4,410 18,480

Break-even point in units = Fixed cost / contribution margin

Margin of safety = Total sales - BEP sales

COMPUTATION OF BEP & MOS
	Warm	Cozy	Total
Contribution Margin (A)	75%	50%	66.67%
Fixed cost (B)	$1680	$840	$2520
BEP in dollars (B/A) (C)	$2240	$1680	$ 3780
Total sales (D)	$21,000	$10,500	$31,500
Margin of safety in $ E=(D-C)	$18,760	$8,820	$ 27,720
MOS % (E/D)	89.33%	84%	88%

d.Sales in Units = (Desired Income before tax + fixed costs)/Contribution Margin per unit
=(10,500/0.7 + 2520)/7.5
2336 pairs

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