Question

Topper Sports, Inc., produces high-quality sports equipment. The company’s Racket Division manufactures three tennis rackets—the Standard, the Deluxe, and the Pro—that are widely used in amateur play. Selected information on the rackets is given below:

	Standard		Deluxe		Pro
Selling price per racket	$	50.00	$	75.00	$	100.00
Variable expenses per racket:
Production	$	28.00	$	33.00	$	35.00
Selling (5% of selling price)	$	2.50	$	3.75	$	5.00

All sales are made through the company’s own retail outlets. The Racket Division has the following fixed costs:

	Per Month
Fixed production costs	$	130,000
Advertising expense		110,000
Administrative salaries		60,000
Total	$	300,000

Sales, in units, over the past two months have been as follows:

	Standard	Deluxe	Pro	Total
April	2,000	1,000	5,000	8,000
May	8,000	1,000	3,000	12,000

Required:

1-a. Prepare contribution format income statements for April.

1-b. Prepare contribution format income statements for May.

3. Compute the Racket Division’s break-even point in dollar sales for April.

4. Whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix?

5. Assume that sales of the Standard racket increase by $21,000. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $21,000? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Answer 1

1-a.	Contribution format income statements for April
		Standard	Deluxe	Pro	Total
	Sales Units	2,000	1,000	5,000	8,000
	Sales revenue	100,000	75,000	500,000	675,000
	Less: Variable expenses:
	Production	56,000	33,000	175,000	264,000
	Selling (5% of selling price)	5,000	3,750	25,000	33,750
	Total Variable Expenses	61,000	36,750	200,000	297,750
	Contribution Margin	39,000	38,250	300,000	377,250
	Less: Fixed Costs
	Fixed Production Cost				130,000
	Advertising Costs				110,000
	Administrative salaries				60,000
	Total Fixed Costs				300,000
	Net Income				77,250
1-b.	Contribution format income statements for May
		Standard	Deluxe	Pro	Total
	Sales Units	8,000	1,000	3,000	12,000
	Sales revenue	400,000	75,000	300,000	775,000
	Less: Variable expenses:
	Production	224,000	33,000	105,000	362,000
	Selling (5% of selling price)	20,000	3,750	15,000	38,750
	Total Variable Expenses	244,000	36,750	120,000	400,750
	Contribution Margin	156,000	38,250	180,000	374,250
	Less: Fixed Costs
	Fixed Production Cost				130,000
	Advertising Costs				110,000
	Administrative salaries				60,000
	Total Fixed Costs				300,000
	Net Income				74,250
3.)	Breakeven point in $ of april
	Contribution margin ratio	55.89%	(377,250 / 675,000 )
	Breakeven point in $	536,769	(300,000 / 55.89%)
4.)	Breakeven point in $ of May
	Contribution margin ratio	48.29%	(374,250 / 775,000 )
	Breakeven point in $	621,247	(300,000 / 48.29%)
	Breakeven sales for may is higher with may sales mix than with april sales mix since the overall contribution margin ratio for may has been dropped.
5.)		Standard	Pro
	Sales Increase	21,000	21,000
	Effect-Increase in net operating income	8,190	10,710
		(21,000 x 39% )	(21,000 x 51% )
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