Question

Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows:

	Hawaiian Fantasy			Tahitian Joy
Selling price per unit	$	12		$	120
Variable expense per unit	$	9		$	48
Number of units sold annually		36,000			5,400

Fixed expenses total $437,000 per year.

Required:

1. Assuming the sales mix given above, do the following:

a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.

2. The company has developed a new product called Samoan Delight that sells for $45 each and that has variable expenses of $27 per unit. If the company can sell 12,000 units of Samoan Delight without incurring any additional fixed expenses:

a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.

b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.

Answer 1

1.

a.

	Hawaiian Fantasy		Tahitian Joy		Total
	Amount	Percentage	Amount	Percentage	Amount	Percentage
Sales	$432,000 (36,000 * $12)	100%	$648,000 (5,400 *$120)	100%	$1,080,000	100%
Variable expenses	$324,000 (36,000 * $9)	75%	$259,200 (5,400 * $48)	40%	$583,200	54%
contribution margin	$108,000	25%	$388,800	60%	$496,800	46%
Fixed Expenses					$437,000
Net Operating Income					$59,800

,b.

Break even point in dollar sales = Fixed expenses / Contribution margin ratio

= $437,000 / 46%

= $950,000

Margin of safety = Current sales - Break even sales

= $1,080,000 - $950,000

= $130,000

Margin of safety in percentage = Margin of safety / Current sales

= $130,000 / $1,080,000

= 12.04%

2.

a.

	Hawaiian Fantasy		Tahitian Joy		Samoan Delight		Total
	Amount	Percentage	Amount	Percentage	Amount	Percentage	Amount	Percentage
Sales	$432,000	100%	$648,000	100%	$540,000 (12,000 * $45)	100%	$1,620,000	100%
Variable expenses	$324,000	75%	$259,200	40%	$324,000 (12,000*$27)	60%	$907,200	56%
Contribution margin	$108,000	25%	$388,800	60%	$216,000	40%	$712,800	44%
Fixed expenses							$437,000
Net Operating income							$275,800

b.

Break even point in dollar sales = Fixed expenses / Contribution margin ratio

= $437,000 / 44%

= $993,182

Margin of safety = Current sales - Break even sales

= $1,620,000 - $993,182

= $626,818

Margin of safety in percentage = Margin of safety / Current sales

= $626,818 / $1,620,000

= 38.69%