Question

In: Accounting

Norman Berhad sells two products; product X and product Y. The information about sales price, variable...

Norman Berhad sells two products; product X and product Y. The information about sales price, variable expenses and total fixed expenses is given below:

	Product X	Product Y
Selling price per unit	RM50	RM100
Variable expenses per unit	RM30	RM40

The total monthly fixed expenses of the company are RM 270,000. Norman Berhad wants to generate a sales revenue of RM 1,000,000 in the next month. To obtain this goal the company has the following options:

Option 1: Sell 6,000 units of product X and 7,000 units of product Y.
Option 2: Sell 14,000 units of product X and 3,000 units of product Y.

Required:

Prepare contribution margin income statement and calculate break-even point in units and sales if Norman Berhad decides to select option 1.

Marks)

Prepare contribution margin income statement and calculate break-even point in units and sales if Norman Berhad decides to select option 2.

marks)

Whichever is the better option, (1) or (2)? Explain.

Expert Solution

	X	Y
Selling price	50	100
Less: Variable cost	30	40
Contribution per unit	20	60

Option 1- 6000 x and 7000 y

Total sales is 6000 x 50+7000 x 100= 1000000

Total contribution 6000 x 20 + 7000x60 = 540000

Ratio of X = 300000/100000 = 30%

Ratio 0f Y = 700000 /100000 =70%

weighted selling price = 50 x 30% + 100 x 70% = 85

Weighted variable cost 30 x 30% + 40 x70% = 37

Weighted contribution = W. selling price - W. variable cost

= 85-37 = 48 per unit

Breakeven sales = fixed cost /contribution per unit

= 270000/48 = 5625 units

x units = 5625 x 30% =1687.5 or 1688

y units =5625 x 70% = 3937.5 or 3938

OPTION 2- 14000 of X and 3000 of Y (Alternative way so that u can understand both method)

Total sales = 14000 x 50 + 3000 x100 = 1000000

Total contribution = 14000 x20 + 3000 x60 =460000

X ratio = 700000/100000 = 70%

Y ratio = 30%

	X	Y
Contribution	20	60
Ratio	70%	30%

Weighted contribution 70% x 20 + 60 x 30% = 32

Fixed cost = 270000

Break even = 270000/32 =8437.5 or 8438

X 8438 x70 % = 5906.6 or 5907

Y 8438 x 30% = 2531.4 or 2532

Comparing contribution

	Option 1	Option 2
Total contribution	540000	460000
Ranking	1	2

Option 1 is better due to higher contribution

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