Question

Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 58,000 units of each product. Sales and costs for each product follow.

	Product T					Product O
Sales		$	974,400				$	974,400
Variable costs			779,520					194,880
Contribution margin			194,880					779,520
Fixed costs			46,880					631,520
Income before taxes			148,000					148,000
Income taxes (32% rate)			47,360					47,360
Net income		$	100,640				$	100,640

1. a) Calculate the contribution Margin ration and Compute the break-even point in dollar sales for each product.

b) Assume that the company expects sales of each product to decline to 41,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax benefit.(Round "per unit" answers to 2 decimal places.)

c) Assume that the company expects sales of each product to increase to 72,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% tax rate). (Round "per unit" answers to 2 decimal places.)

Answer 1

a) Calculation of Contribution Margin Ratio and Break Even Point in Dollar

	Product T	Product O
i) Contribution Margin	194,880	779,520
ii) Sales	974,400	974,400
iii) Contribution Margin Ratio [(i/ii)*100]	20%	80%
iv) Fixed costs	46,880	631,520
v) Break Even Point in Dollars (iv/iii)	234,400	789,400

b) Calculation of Selling price, variable cost and contribution margin per unit (Amounts in $)

	Product T	Product O
Selling Price per unit	16.80 (974,400/58,000 units)	16.80 (974,400/58,000 units)
Variable cost per unit	13.44 (779,520/58,000 units)	3.36 (194,880/58,000 units)
Contribution margin per unit	3.36 (194,880/58,000 units)	13.44 (779,520/58,000 units)

Forecasted Income Statement based on 41,000 units (Amounts in $)

	Product T	Product O
Sales	688,800 (41,000*16.80)	688,800 (41,000*16.80)
Less: Variable costs	551,040 (41,000*13.44)	137,760 (41,000*3.36)
Contribution Margin	137,760	551,040
Less: Fixed Costs	46,880	631,520
Income/(Loss) before taxes	90,880	(80,480)
Income Taxes (32% rate)	(29,082)	25,754
Net Income/(Loss)	61,798	(54,726)

c) Forecasted Income Statement based on 72,000 units (Amounts in $)

	Product T	Product O
Sales	1,209,600 (72,000*16.80)	1,209,600 (72,000*16.80)
Less: Variable costs	967,680 (72,000*13.44)	241,920 (72,000*3.36)
Contribution Margin	241,920	967,680
Less: Fixed Costs	46,880	631,520
Income/(Loss) before taxes	195,040	336,160
Income Taxes (32% rate)	(62,413)	(107,571)
Net Income/(Loss)	132,627	228,589