Question

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	$	20		$	125
Variable expense per unit	$	14		$	25
Number of units sold annually		30,000			5,200

Fixed expenses total $652,400 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 $40 per unit. If the company can sell 12,500 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.

Answer 1

Req 1A
		30,000		5,200
			Island Novelties Inc
			Contribution income statement
		Hawaiian Fantasy		Tahitian joy		Total
		Amount	%	Amount	%	Amount	%
Sales		600000	100%	650000	100%	1250000	100%
Variable expenses		420000	70%	130000	20%	550000	44%
Contribution margin		180000	30%	520000	80%	700000	56%
Fixed expenses						652,400
Net operating income						47,600
Req 1B
Break even point in dollar sales				1165000
margin of safety in dollars				85000
margin of safety percentage				6.8%
Break even point in dollar sales = fixed expense/contribution margin ratio
			652400/56%
			1165000
margin of safety             = actual sales - break even sales
		1,250,000-1,165,000
		85000
Margin of safety percentage = margin of safety/actual sales
		85000/1,250,000
		6.8%
Required 2A
			Island Novelties Inc
			Contribution income statement
		Hawaiian Fantasy		Tahitian joy		Samoan		total
		Amount	%	Amount	%	Amount	%	amount	%
Sales		600000	100%	650000	100.0%	625000	100%	1875000	100.0%
Variable expenses		420000	70%	130000	20.0%	500000	80%	1050000	56.0%
Contribution margin		180000	30%	520000	80.0%	125000	20%	825000	44.0%
Fixed expenses								652,400
Net operating income								172,600
Req 2b
Break even point in dollar sales				1482727
margin of safety in dollars				392273
margin of safety percentage				20.9%
Break even point in dollar sales = fixed expense/contribution margin ratio
			652400/44%
			1482727.3
margin of safety             = actual sales - break even sales
		1,875,000-1,482,727
		392273
Margin of safety percentage = margin of safety/actual sales
		392273/1,875,000
		20.9%