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 15,000 portable grills, 45,000 stationary grills, and 5,000 smokers. Information on the three models is as follows: Portable Stationary Smokers Price $89 $196 $255 Variable cost per unit 45 126 141 Total fixed cost is $1,918,440. 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 = 3 : 9 : 1 or 15 : 45 : 5
Portable Grills = 15000/5000 = 3
Stationery Grills = 45000/5000 = 9
Smokers = 5000/5000 = 1

2. Contribution Margin per unit = Sales Price - Variable Cost per unit
Portable Grills = $89-45 = $44 per unit
Stationery Grills = $196-126 = $70 per unit
Smokers = $255-141 = $114 per unit
Weighted Contribution Margin per unit = $44 x 3/13 + 70 x 9/13 + 114 x 1/13 = $67.38 per unit

Break Even Units = Fixed Costs / Weighted Contribution Margin per unit
= $1918440 / 67.38 = 28472 units or 28470 units

Portable Grills = 28470 x 3/13 = 6570 units
Stationery Grills = 28470 x 9/13 = 19710 units
Smokers = 28470 x 1/13 = 2190 units

3.

Income Statement
	Portable Smokers	Stationery Grills	Smokers	Total
Sales Revenue	$ 1,335,000	$ 8,820,000	$ 1,275,000	$ 11,430,000
Variable Costs	$     675,000	$ 5,670,000	$     705,000	$     7,050,000
Contribution Margin	$     660,000	$ 3,150,000	$     570,000	$     4,380,000
Fixed Costs				$     1,918,440
Operating Income				$     2,461,560

Contribution Margin Ratio = $4380000 / $11430000 = 38.32%

Break Even Sales = $1918440 / 38.32% = $5006340

Margin of Safety = (11430000-5006340)/11430000 = 56.20%