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 $ 55.00 $ 86.00 $ 125.00 Variable expenses per racket: Production $ 33.00 $ 43.00 $ 45.00 Selling (5% of selling price) $ 2.75 $ 4.30 $ 6.25 All sales are made through the company’s own retail outlets. The Racket Division has the following fixed costs: Per Month Fixed production costs $ 144,000 Advertising expense 124,000 Administrative salaries 74,000 Total $ 342,000 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 $22,400. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $22,400? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Answer 1

Ans.

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

	Standard		Deluxe		Pro		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Units	2000		1000		5000		8000
Sales	$       110,000.00	100%	$    86,000.00	100%	$ 625,000.00	100%	$ 821,000.00	100%
Variable Expenses
Production	$          66,000.00	60%	$    43,000.00	50%	$ 225,000.00	36%	$ 334,000.00	40.68%
Selling	$            5,500.00	5%	$      4,300.00	5%	$     31,250.00	5%	$    41,050.00	5.00%
Total Variable Expenses	$          71,500.00	65%	$    47,300.00	55%	$ 256,250.00	41%	$ 375,050.00	45.68%
Contribution Margin	$          38,500.00	35%	$    38,700.00	45%	$ 368,750.00	59%	$ 445,950.00	54.32%
Fixed Expenses
Production Costs							$ 144,000.00
Advertising Expenses							$ 124,000.00
Administrative Salaries							$    74,000.00
Total Fixed Expenses							$ 342,000.00
Net Operating Income							$ 103,950.00

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

	Standard		Deluxe		Pro		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Units	8000		1000		3000		12000
Sales	$       440,000.00	100%	$    86,000.00	100%	$ 375,000.00	100%	$ 901,000.00	100%
Variable Expenses
Production	$       264,000.00	60%	$    43,000.00	50%	$ 135,000.00	36%	$ 442,000.00	49.06%
Selling	$          22,000.00	5%	$      4,300.00	5%	$     18,750.00	5%	$    45,050.00	5.00%
Total Variable Expenses	$       286,000.00	65%	$    47,300.00	55%	$ 153,750.00	41%	$ 487,050.00	54.06%
Contribution Margin	$       154,000.00	35%	$    38,700.00	45%	$ 221,250.00	59%	$ 413,950.00	45.94%
Fixed Expenses
Production Costs							$ 144,000.00
Advertising Expenses							$ 124,000.00
Administrative Salaries							$    74,000.00
Total Fixed Expenses							$ 342,000.00
Net Operating Income							$    71,950.00

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

Fixed Cost / Contribution margin ratio = $ 342,000 / 54.32% = $ 629,602 (approx)

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

For May

Breakeven Point in Dollar = Fixed Cost / Contribution Margin ratio

= $ 342,000 / 45.94% = $ 744,450 approx)

Therefore , break-even for May is HIGHER with May’s sales mix than with April’s sales mix.

5.Assume that sales of the Standard racket increase by $22,400. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $22,400? Do not prepare income statements; use the incremental analysis approach in determining your answer.

	Standard		Pro
	Amount	%	Amount	%
Contribution Margin		35		59
Sales Increase	$          22,400.00		$            22,400.00
Effect on net operating Income	$            7,840.00		$            13,216.00
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