Question

Texas-Q Company produces and sells barbeque grills. Texas-Q sells three models: a small portable gas grill, a larger stationary gas grill, and the specialty smoker. In the coming year, Texas-Q expects to sell 15,300 portable grills, 45,900 stationary grills, and 5,100 smokers. Information on the three models is as follows:

	Portable	Stationary	Smokers
Price	$86	$205	$245
Variable cost
per unit	40	133	143

Total fixed cost is $1,873,680.

	Required:
1.	What is the sales mix of portable grills to stationary grills to smokers?
2.	Compute the break-even quantity of each product.
3.	Prepare an income statement for Texas-Q for the coming year. What is the overall contribution margin ratio? Use the contribution margin ratio to compute overall break-even sales revenue. Enter the contribution margin ratio as a percentage rounded to two decimal places; round the break-even sales revenue to the nearest dollar.
4.	Compute the margin of safety for the coming year.

Answer 1

1. Sales Mix
For every unit sale of smoker, 3 units of portable grills and 9 units of stationery grills are sold.
i.e. 3 : 9 : 1

2.

	Portable	Stationery	Smokers	Total
Sale price	$           86.00	$         205.00	$          245.00
Less : Variable expense	$           40.00	$         133.00	$          143.00
Contribution margin per unit	$           46.00	$            72.00	$          102.00
Weights	3	9	1	13
Weighted Contribution margin	$         138.00	$         648.00	$          102.00	$          888.00
Weighted average contribution margin per unit				$            68.31

Break even quantity = Fixed Costs / Weighted average contribution margin per unit
= $1873680 / 68.31 = 27430 units

Portable = 27430 / 13 x 3 = 6330 units
Stationery = 27430 / 13 x 9 = 18990 units
Smokers = 27430 / 13 x 1 = 2110 units

3.

	Portable	Stationery	Smokers	Total
Sale price	$    1,315,800	$    9,409,500	$    1,249,500	$ 11,974,800
Less : Variable expenses	$       612,000	$    6,104,700	$        729,300	$     7,446,000
Contribution margin	$       703,800	$    3,304,800	$       520,200	$    4,528,800
Less : Fixed expenses				$     1,873,680
Net Operating Income				$    2,655,120

Break even revenue = $1873680 / 37.82% = $4954280 or $4954204
Contribution Margin Ratio = $4528800 / 11974800 = 37.82%

4. Margin of Safety = Actual Sales - Break even sales
= $11974800 - 4954280 = $7,020,520