Question

In: Accounting

Basu Company produces two types of sleds for playing in the snow: basic sled and aerosled....

Basu Company produces two types of sleds for playing in the snow: basic sled and aerosled. The projected income for the coming year, segmented by product line, follows:

Basic Sled Aerosled Total
Sales $3,000,000 $2,400,000 $5,400,000
Total variable cost 1,000,000 1,000,000 2,000,000
Contribution margin $2,000,000 $1,400,000 $3,400,000
Direct fixed cost 778,000 650,000 1,428,000
Product margin $1,222,000 $750,000 $1,972,000
Common fixed cost 198,900
Operating income $1,773,100

The selling prices are $30 for the basic sled and $60 for the aerosled. (Round break-even packages and break-even units to the nearest whole unit.)

Required:

1. Compute the number of units of each product that must be sold for Basu to break even.

Basic units
Aero units

2. Assume that the marketing manager changes the sales mix of the two products so that the ratio is five basic sleds to three aerosleds. Compute the number of units of each product that must be sold for Basu to break even. Round your answers to the nearest whole number.

Basic units
Aero units

3. Conceptual Connection: Refer to the original data. Suppose that Basu can increase the sales of aerosleds with increased advertising. The extra advertising would cost an additional $195,000, and some of the potential purchasers of basic sleds would switch to aerosleds. In total, sales of aerosleds would increase by 12,000 units, and sales of basic sleds would decrease by 5,000 units. Would Basu be better off with this strategy? If so, give the amount of increase in income.
Yes    $

Solutions

Expert Solution

Computation of Weighted Average Contribution Margin Ratio
Prdouct No. of Unit Sold Sales mix %
(a)
Contribution Peer Unit Weighted average contribution Margin (WACM) (a*b)
Basic 100000 71% $20.00 $14.29
Aero 40000 29% $35.00 $10.15
Weighted Average CM $24.44
Part-1
BEP in Unit= Fixed Cost/ Weighted Average CM
=(1428000+198900)/24.44= 66567 Unit
For Basic= 66567*71%=202500
For Aerosled = 66567*29%=19304
Computation of Weighted Average Contribution Margin Ratio
Prdouct No. of Unit Sold Sales mix %
(a)
Contribution Peer Unit Weighted average contribution Margin (WACM) (a*b)
Basic 100000 63% $20.00 $12.50
Aero 40000 38% $35.00 $13.13
Weighted Average CM $25.63
Part-2
BEP in Unit= Fixed Cost/ Weighted Average CM
=(1428000+198900)/25.63= 63476 Unit
For Basic= 63476*63%=39990 Unit
For Aerosled = 63476*29%=24121 Unit
Part-3
Basic Sled Aerrosed Total
Sales $2,850,000 $3,120,000 $5,970,000
Total variable cost 950,000 1,300,000 2,250,000
Contribution margin $1,900,000 $1,820,000 $3,720,000
Direct fixed cost 778,000 650,000 1,428,000
Product margin $1,122,000 $1,170,000 $2,292,000
Common fixed cost 393,900
Operating income $1,898,100
yes, there is increase in income by $125000

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