Question

1. Russell Corporation sells three different models of mosquito “zapper.” Model A12 sells for $65 and has variable costs of $55. Model B22 sells for $150 and has variable costs of $110. Model C124 sells for $425 and has variable costs of $325. The sales mix of the three models is as follows: A12, 55%; B22, 25%; and C124, 20%.

a). What is the weighted-average unit contribution margin? (Round answer to 2 decimal places, e.g. 15.25.)

b). If the company’s fixed costs are $262,700, how many units of each model must the company sell in order to break even?

Units of A12			units
Units of B22			units
Units of C124			units
Break-even in units total			units

2. Kirkland Video Games Inc. is developing a new video game. It is the most sophisticated game on the market. It sells the video game for $285 per copy. Variable costs to produce and sell the video game amount to $70 per copy. Fixed costs amount to $453,650. The company anticipates selling 400 copies of the game per month. The company’s policy is to stop producing the video game as soon as a competitor comes out with a more sophisticated version.

a). Calculate the amount of operating income the company will earn if it takes 11 months for a competitor to produce a more sophisticated version of the video game.

b). Calculate how many units of the video game the company will have to sell in order to break even.

c). If the company wishes to earn $26,350 over the product’s life, calculate the selling price of the video game if a competitor introduces a more sophisticated version of the video game in 4 months. Assume that unit sales are 400 copies per month. (Round answer to 2 decimal places, e.g. 15.25.)

3. The Richibouctou Inn is trying to determine its break-even point. The inn has 71 rooms available that are rented at $60 a night. Operating costs are as follows:

Salaries		$9,240	per month		Maintenance		$480	per month
Utilities		$1,930	per month		Housekeeping service		$6	per room
Depreciation		$1,310	per month

Other costs

$24

per room

a). Determine the inn’s break-even point in the number of rented rooms per month and dollars.

Break-even point			rooms
Break-even point		$

b). If the inn plans on renting 32 rooms per day (assuming a 30-day month), what is the monthly margin of safety in dollars and the margin of safety ratio?

Monthly margin of safety		$
Margin of safety ratio			%

Answer 1

Question 1

Part 1

Particulars	A12	B22	C124
Sales Price per Unit	65	150	425
Less: Variable Costs per Unit	55	110	325
Contribution Margin per Unit	10	40	100
Sales Mix Ratio	11	5	4

Sales Mix Ratio is 55% for A12 , 25% for B22 and 20% for C 124 which means for every 20 Units Sold 11 Units are Sold for A12, 5 Units are Sold for B 22 and 4 Units for C124)

Contribution Margin on Sale of 20 Units as per Standard Sales Mix

Particulars	A12	B22	C124
Contribution Margin per Unit	10	40	100
* Unit of Standard Sales Mix	11	5	4
Contribution Margin	110	200	400

Total Contribution Margin = 110 + 200 + 400 = $ 710

Weighted Average Contribution Margin per Unit = Total Contribution Margin / Sale of 20 Units of a Standard Sales Mix

= 710 / 20

= $ 35.5

Part 2

Break Even Point in Units = Total Fixed Costs / Weighted Average Contribution Margin per Unit

Weighted Average Contribution Margin per Unit = $ 35.5

Fixed Costs = $ 262,700

Break Even Point in Units = 262,700 / 35.50

Break Even Point in Units Total = 7,400 Units

Particulars	A12	B22	C124
Total Break Even Point in Units	7,400	7,400	7,400
* Percentage of Standard Sales Mix	55%	25%	20%
Break Even Point in Units Product Wise	4,070 Units	1,850 Units	1,480 Units

Question 2

Part A

Sales if Takes 11 Months for Competitors to produce the Product

Total Sales in Units = 400 Units * 11 Months = 4,400 Units

Sales Revenue = 4,400 Units * Sales Price per Unit

Sales Revenue = 4,400 Units * $ 285 per Unit = $ 12,54,000

Variable Costs = 4,400 Units * $ 70 per Unit = $ 308,000

Fixed Costs = $ 453,650

Operating Income on Sale of 4,400 Units = Sales Revenue - Variable Costs - Fixed Costs

= 12,54,000 - 308,000 - 453,650

= $ 492,350

Part B

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit

= 285 - 70 = $ 215 per Unit

Break Even Point in Units = 453,650 / 215

Break Even Point in Units= 2,110 Copies

Part C

Target Income = $ 26,350

Unit Sales = 400 Units per Month * 4 Months = 1,600 Units

Let Sales Price per Unit = $ X

Sales Revenue = 1,600 X

Variable Costs = 1,600 Units * $ 70 per Unit = $ 112,000

Fixed Costs = $ 453,650

Target Income = Sales Revenue - Variable Costs - Fixed Costs

26,350 = 1,600X - 112000 - 453,650

1,600X = 26,350 + 112,000 + 453,650

1,600X = 592,000

X = 592,000 / 1,600

X = $ 370 Per Copy

The Company should set a price of $ 370 per Copy.

Question 3

Part A

Fixed Costs = Utilities + Depreciation + Salaries + Maintenance

= 1,930 + 1,310 + 9,240 + 480

Fixed Costs per Month = $ 12,960

Contribution Margin per Unit = Room Rent per Room - Housekeeping Service per Room - Other Cost per Room

= 60 - 6 -24

= $ 30 per Room

Break Even Point in Units = Fixed Costs per Month / Contribution Margin per Room

= 12,960 / 30

= 432 Rooms Per Month

Break Even Point in Dollars = Fixed Costs / Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin per Room/ Room Rent per Room * 100

= 30/60 * 100 = 50%

Break Even Point in Dollars = 12,960 / 50%

Break Even Point in Dollars =

$ 25,920

Part B

Total Room = 32

Total Room Days = Total Room * Number of Days per Month

= 32 * 30= 960

Total Revenue = 960 Room Days * $ 60 per Room

= $ 57,600

Margin of Safety in Dollars = Total Revenue - Break Even Revenue

= 57,600 - 25,920

= $ 31,680

Margin of Safety in % = Margin of Safety in Dollars / Total Sales in Dollars * 100

= 31,680 / 57,600 * 100

= 55%