Question

Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue, cost, and sales data for the two products follow:

	Hawaiian Fantasy			Tahitian Joy
Selling price per unit	$	14		$	120
Variable expenses per unit	$	7		$	36
Number of units sold annually		24,000			5,200

Fixed expenses total $510,300 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 break-even point in dollar sales for the company as a whole and the margin of safety in both dollars and percent. Round your "Margin of safety percentage" to 1 decimal place (i.e .1234 should be entered as 12.3).

         

2.	The company has developed a new product to be called Samoan Delight. Assume that the company could sell 14,000 units at $60 each. The variable expenses would be $42 each. The company’s fixed expenses would not change.

a.	Prepare another contribution format income statement, including sales of the Samoan Delight (sales of the other two products would not change). Round your "Percentage" answers to 1 decimal place (i.e .1234 should be entered as 12.3).

         

b.	Compute the company’s new break-even point in dollar sales and the new margin of safety in both dollars and percent. Round your dollar amounts to nearest whole number. Round your "Percentage" answer to 1 decimal place (i.e .1234 should be entered as 12.3).

         

Answer 1

Island Novelties Inc.,

Contribution Margin Income Statement -

Answer to 1 (a)

Answer to 1 (b)

Break-even point in Sales is the volume of sales at which level the total revenue equals the total costs. At this point the Company is at a position of no gain or no loss.

Break-even point in sales value can be calculated by dividing the fixed costs by the contribution margin ratio

However, the contribution margin ratio is calculated by dividing the contribution margin by sales

Therefore, in the given instance contribution margin ratio is equal =

Margin of Safety - It is the additional sales value that is over the break-even sales. It also indicates the amount of sales that a Company can loose before it becomes unprofitable

Margin of Safety = Actual Sales - Break Even Sales

= 960000-810000

= $150,000.00

Margin of Safety in % = (Actual Sales - Break Even Sales) / Actual Sales x 100

=(960000-810000)/960000*100

= 15.6%

Answer to 2 (a)

Revised contribution margin statement including the sales of new product Samaon Delight

Answer to 2 (b)

New break even point in dollar sales