Question

Problem 3-38 (Part Level Submission) Ivanhoe Company produces a molded briefcase that is distributed to luggage stores. The following operating data for the current year has been accumulated for planning purposes. Sales price $42.00 Variable cost of goods sold 14.00 Variable selling expenses 12.60 Variable administrative expenses 5.00 Annual fixed expenses Overhead $28,844,400 Selling expenses 5,731,900 Administrative expenses 12,018,500 Ivanhoe can produce 5,547,000 cases a year. The projected net income for the coming year is expected to be $6,656,400. Ivanhoe is subject to a 40% income tax rate. During the planning sessions, Ivanhoe’s managers have been reviewing costs and expenses. They estimate that the company’s variable cost of goods sold will increase 15% in the coming year and that fixed administrative expenses will increase by $554,700. All other costs and expenses are expected to remain the same. Ivanhoe Company’s managers are considering expanding the product line by introducing a leather briefcase. The new briefcase is expected to sell for $92.00; variable costs would amount to $38.00 per briefcase. If Ivanhoe introduces the leather briefcase, the company will incur an additional $1,109,400 per year in advertising costs. Ivanhoe’s marketing department has estimated that one new leather briefcase would be sold for every four molded briefcases. After additional research, Ivanhoe’s marketing manager believes that if the price of the new leather briefcase drops to $68.00, it will be more attractive to potential customers. She also believes that at that price, the additional advertising cost could be cut to $656,765. These changes would result in sales of one molded briefcase for every three leather briefcases. Based on these circumstances, how many units of each briefcase would be required to break even in the coming year? (For computational purposes round contribution margin per unit to 2 decimal places, e.g. 0.38. Round answers to 0 decimal places, e.g. 25,000.)

Answer 1

Assume if we go with Ivanhoe's Marketing Manager suggestion (i.e.) New leather briefcase at $ 68 per unit at the ratio of 1:3 (Molded vs Leather) briefcase: here's the workings and BEP(Break Even Point) Sales would be 2,000,000 units

Description	Ref	Molded Briefcase	Leather Briefcase	Total
Sales Ratio	A	1	3	4
Selling Price	B	42.00	68.00
Variable Cost	C	33.70	38.00
Contribution Margin	(D) = (B)- ( C)	8.30	30.00
Weighted Average	( E) = (D) * (A)	8.30	90.00	98.30
Weighted Average / Sales Ratio	(F) = ( E) / (A)			24.58
Fixed Cost	(G)			47,806,265
Break Even Point Sales (BEP) (Rounded off)	(G)/(F)			2,000,000
Apply sales ratio to BEP		500,000	1,500,000

If we go by Marketing Department suggestion (i..e) $ 92 per unit with the ratio of 4:1, here's the workings and BEP Sales would be 3,000,000 units

Description	Ref	Molded Briefcase	Leather Briefcase	Total
Sales Ratio	A	4	1	5
Selling Price	B	42.00	92.00
Variable Cost	C	33.70	38.00
Contribution Margin	(D) = (B)- ( C)	8.30	54.00
Weighted Average	( E) = (D) * (A)	33.20	54.00	87.20
Weighted Average / Sales Ratio	(F) = ( E) / (A)			17.44
Fixed Cost	(G)			48,258,900
Break Even Point Sales (BEP) (Rounded off)	(G)/(F)			3,000,000
Apply sales ratio to BEP		2,400,000	600,000