Question

On-the-Go, Inc., produces two models of traveling cases for laptop computers: the Programmer and the Executive. The bags have the following characteristics:

	Programmer			Executive
Selling price per bag	$	60		$	90
Variable cost per bag	$	30		$	40
Expected sales (bags) per year		8,000			12,000

The total fixed costs per year for the company are $665,000.

Required:

a. What is the anticipated level of profits for the expected sales volumes?

b. Assuming that the product mix is the same at the break-even point, compute the break-even point. (Round your final answer up to the nearest whole unit.)

c. If the product sales mix were to change to nine Programmer-style bags for each Executive-style bag, what would be the new break-even volume for On-the-Go? (Round your final answer up to the nearest whole unit.)

Answer 1

a) Anticipated level of profits for the expected sales volumes:

Particulars	Programmer	Executive
Selling price per bag	60	90
Less: Variable cost per bag	30	40
Contribution Per bag	30	50
No of Bags	8,000	12,000
Total Contribution (Contribution Per bag*No of Bags)	240,000	600,000

Profit = Total Contribution from two models - Fixed cost

= 240,000 + 600,000 - 665,000

= $175,000

b) Computing break-even point assuming that the product mix is the same at the break-even point:

Break-even point = Fixed cost / weighted average contribution magin

= 665,000 / (30*8000/20000)+50*12000/20000)

= 665,000 / (30*0.4) + (50*0.6)

= 665,000 / (12 + 30)

= 665,000/42

= 15,833

c) Computing break-even volume for On-the-Go if the product sales mix were to change to nine Programmer-style bags for each Executive-style bag:

Now the ratio is 90:10

Break-even point =665,000 / (30*90/100) + (50*10/100)

= 665,000 / (30*0.9) + (50*0.1)

= 665,000 / (27 + 5)

= 665,000/32

= 20,781