Question

On-the-Go, Inc., produces two models of traveling cases for laptop computers: the Programmer and the Executive. The bags have the following characteristics:

	Programmer			Executive
Selling price per bag	$	70		$	100
Variable cost per bag	$	30		$	50
Expected sales (bags) per year		7,000			10,500

The total fixed costs per year for the company are $666,000.

Required:

a. What is the anticipated level of profits for the expected sales volumes?

b. Assuming that the product mix is the same at the break-even point, compute the break-even point. (Round your final answer up to the nearest whole unit.)

c. If the product sales mix were to change to nine Programmer-style bags for each Executive-style bag, what would be the new break-even volume for On-the-Go? (Round your final answer up to the nearest whole unit.)

Answer 1

a. What is the anticipated level of profits for the expected sales volumes?

Sales [ (7000 x $70) + (10,500 x $100)]	$15,40,000
Less : Variable Costs [ (7000 x $30) + (10,500 x $50)]	$7,35,000
Contribution Margin [ (7000 x $40) + (10,500 x $50)]	$8,05,000
Less : Fixed Costs	$6,66,000
Profit	$1,39,000

Anticipated level of profits for the expected sales volumes = $1,39,000

b. Assuming that the product mix is the same at the break-even point, compute the break-even point

Weight

Programmer = 7,000 ÷ (7,000 + 10,500) = 0.40

Executive = 10,500 ÷ (7,000 + 10,500) = 0.60

Weighted-average Contribution per unit

= ( 0.40 × $40) + ( 0.60 × $50)

= $16 + $30

= $46 per unit

Break-even point = Fixed Costs / Weighted-average Contribution per unit

= $6,66,000 / $46

= 14,478 Units

Break-Even Unit Programmer = 14,478 Units x 0.40 = 5,791 Units

Break-Even Unit Executive = 14,478 Units x 0.60 = 8,687 Units

c. If the product sales mix were to change to nine Programmer-style bags for each Executive-style bag, what would be the new break-even volume for On-the-Go?

Weight

Programmer = 0.90

Executive = 0.10

Weighted-average Contribution per unit

= ( 0.90 × $40) + ( 0.10 × $50)

= $36 + $5

= $41 per unit

Break-even point = Fixed Costs / Weighted-average Contribution per unit

= $6,66,000 / $41

= 16,244 Units

Break-Even Unit Programmer = 16,244 Units x 0.90 = 14,620 Units

Break-Even Unit Executive = 16,244 Units x 0.10 = 1,624 Units