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In: Accounting

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price,...

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows: Hawaiian Fantasy Tahitian Joy Selling price per unit $ 30 $ 125 Variable expense per unit $ 21 $ 25 Number of units sold annually 10,000 5,600 Fixed expenses total $565,500 per year. Required: 1. Assuming the sales mix given above, do the following: a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole. b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage. 2. The company has developed a new product called Samoan Delight that sells for $50 each and that has variable expenses of $35 per unit. If the company can sell 20,000 units of Samoan Delight without incurring any additional fixed expenses: a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change. b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.

Solutions

Expert Solution

Req 1.
Contribution margin Income Statement
Hawaiin Tahitian Total
Sales revenue 300000 700000 1000000
Less: Variable cost 210000 140000 350000
Contribution margin 650000
Less: Fixed cost 565500
Net income 84500
CM ratio: Total contribution/ Ttotal sales *100
650000 /1000000 *100 = 65%
Break even sales = Fixed cost / CMm ratio
565500 / 65% = 870000
Margin of saferty = Total sales - Break even sales
1000,000- 870000 = 130000
% margin of safetty: 130000 /1000000*100 = 13%
Req 2.
Contribution margin Income Statement
Hawaiin Tahitian Samoan Total
Sales revenue 300000 700000 1000000 2000000
Less: Variable cost 210000 140000 700000 1050000
Contribution margin 950000
Less: Fixed cost 565500
Net income 384500
CM ratio: Total contribution/ Ttotal sales *100
950000 /2000000 = 47.50%
Break even sales = Fixed cost / CMm ratio
565500/47.50% =1190526
Margin of saferty = Total sales - Break even sales
2000000-1190526= 809474
% margin of safetty: 809474 / 2000000 *100 = 40.47%

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