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	$	70.00	$	106.00	$	160.00
Variable expenses per racket:
Production	$	42.00	$	53.00	$	64.00
Selling (5% of selling price)	$	3.50	$	5.30	$	8.00

All sales are made through the company’s own retail outlets. The Racket Division has the following fixed costs:

	Per Month
Fixed production costs	$	156,000
Advertising expense		136,000
Administrative salaries		86,000
Total	$	378,000

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 $23,600. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $23,600? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Answer 1

1-a.

	Standard		Deluxe		Pro		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales Revenue	$       140,000	100.00%	$          106,000	100.00%	$      800,000	100.00%	$   1,046,000	100.00%
Variable Expenses
Variable Production Costs	$         84,000	60.00%	$            53,000	50.00%	$      320,000	40.00%	$      457,000	43.69%
Sales Commission	$            7,000	5.00%	$              5,300	5.00%	$        40,000	5.00%	$        52,300	5.00%
Total Variable Expenses	$         91,000	65.00%	$            58,300	55.00%	$      360,000	45.00%	$      509,300	48.69%
Contribution Margin	$         49,000	35.00%	$            47,700	45.00%	$      440,000	55.00%	$      536,700	51.31%
Fixed Expenses
Fixed Production Costs							$      156,000	14.91%
Advertising							$      136,000	13.00%
Administrative							$        86,000	8.22%
Total Fixed Expenses							$      378,000	36.14%
Net Operating Income							$      158,700	15.17%

1-b

	Standard		Deluxe		Pro		Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales Revenue	$       560,000	100.00%	$          106,000	100.00%	$      480,000	100.00%	$   1,146,000	100.00%
Variable Expenses
Variable Production Costs	$       336,000	60.00%	$            53,000	50.00%	$      192,000	40.00%	$      581,000	50.70%
Sales Commission	$         28,000	5.00%	$              5,300	5.00%	$        24,000	5.00%	$        57,300	5.00%
Total Variable Expenses	$       364,000	65.00%	$            58,300	55.00%	$      216,000	45.00%	$      638,300	55.70%
Contribution Margin	$       196,000	35.00%	$            47,700	45.00%	$      264,000	55.00%	$      507,700	44.30%
Fixed Expenses
Fixed Production Costs							$      156,000	13.61%
Advertising							$      136,000	11.87%
Administrative							$        86,000	7.50%
Total Fixed Expenses							$      378,000	32.98%
Net Operating Income							$      129,700	11.32%

3.
Break even point = Fixed cost / Weighted Average Contribution Margin Ratio
= $378000 / 51.31% = $736,698 or $736702

4.
Break even point would be higher, since contribution margin ratio decrease due higher sales of low contribution margin product

5.
Standard Racket sale increase $23600, Net Operating income will increase by $8260 i.e. 23600 x 35%
Pro Racket sale increase $23600, Net Operating income will increase by $12980 i.e. 23600 x 55%