Question

Required information [The following information applies to the questions displayed below.] Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow. Product T Product O Sales $ 2,000,000 $ 2,000,000 Variable costs 1,600,000 250,000 Contribution margin 400,000 1,750,000 Fixed costs 125,000 1,475,000 Income before taxes 275,000 275,000 Income taxes (32% rate) 88,000 88,000 Net income $ 187,000 $ 187,000 Required: 1. Compute the break-even point in dollar sales for each product. (Enter CM ratio as percentage rounded to 2 decimal places.)

Required information

[The following information applies to the questions displayed below.]

Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.

	Product T					Product O
Sales		$	2,000,000				$	2,000,000
Variable costs			1,600,000					250,000
Contribution margin			400,000					1,750,000
Fixed costs			125,000					1,475,000
Income before taxes			275,000					275,000
Income taxes (32% rate)			88,000					88,000
Net income		$	187,000				$	187,000

Required:

1. Compute the break-even point in dollar sales for each product. (Enter CM ratio as percentage rounded to 2 decimal places.)

2. Assume that the company expects sales of each product to decline to 30,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax benefit. (Enter losses and tax benefits, if any, as negative values.)

3. Assume that the company expects sales of each product to increase to 60,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% tax rate).

Answer 1

Solution:-

1. Compute the break-even point in dollar sales for each product:-

Formula	Product T	Product O
CMR = CM / Sales	400000 / 2000000 = .20	1750000 / 2000000 = .875
BE$ = FE / CMR	125000 / .20 = 625000	1475000 / .875 =1685714

2. Assume that the company expects sales of each product to decline to 30,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax benefit:-

Henna Company
Forcasted Contribution margin Income Statement
	Product T	Product O	Total
Sales	1,200,000	1,200,000	2,400,000
Variable cost	960,000	150,000	1,110,000
Contribution margin	240,000	1,050,000	1,290,000
Fixed cost	125,000	1,475,000	1,600,000
Income (Loss) before taxes	115,000	(425,000)	(310,000)
Income taxes (tax benefit)	36,800	(136,000)	(99,200)
Net income (loss)	78,200	(289,000)	(210,800)

3. Assume that the company expects sales of each product to increase to 60,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% tax rate):-

Forcasted Contribution margin Income Statement
	Product T	Product O	Total
Sales	2,400,000	2,400,000	4,800,000
Variable cost	1,920,000	300,000	2,220,000
Contribution margin	480,000	2,100,000	2,580,000
Fixed cost	125,000	1,475,000	1,600,000
Income (Loss) before taxes	355,000	625,000	980,000
Income taxes (tax benefit)	113,600	200,000	313,600
Net income (loss)	241,400	425,000	666,400