Question

Cherry Blossom Products Inc. produces and sells yoga-training products: how-to DVDs and a basic equipment set (blocks, strap, and small pillows). Last year, Cherry Blossom Products sold 13,500 DVDs and 4,500 equipment sets. Information on the two products is as follows: DVDs Equipment Sets Price $8 $25 Variable cost per unit 4 15 Total fixed cost is $93,330. Suppose that in the coming year, the company plans to produce an extra-thick yoga mat for sale to health clubs. The company estimates that 9,000 mats can be sold at a price of $15 and a variable cost per unit of $9. Total fixed cost must be increased by $31,110 (making total fixed cost $124,440). Assume that anticipated sales of the other products, as well as their prices and variable costs, remain the same. 2. Compute the break-even quantity of each product. Break-even DVDs units? Break-even equipment sets units? Break-even yoga mats units? 3a. Prepare an income statement for Cherry Blossom Products for the coming year. 3b. What is the overall contribution margin ratio? Use the contribution margin ratio to compute overall break-even sales revenue. (Note: Round the contribution margin ratio to the nearest whole percent; round the break-even sales revenue to the nearest dollar.) Overall contribution margin ratio % Overall break-even sales revenue $ 4. Compute the margin of safety for the coming year in sales dollars.

Answer 1

Solution 2:

Computation of weighted average contribution margin per unit - Cherry Blossom Products Inc.
Particulars	DVD	Equipment set	Yoga Mat	Total
Selling price per unit	$8.00	$25.00	$15.00
Variable cost per unit	$4.00	$15.00	$9.00
Contribution margin per unit	$4.00	$10.00	$6.00
Sales units	13500	4500	9000	27000
Sales Mix	50%	16.67%	33.33%
Weighted average contribution per unit	$2.00	$1.67	$2.00	$5.67

Breakeven units = Total fixed cost / weighted average contribution per unit = $124,440 / $5.67 = 21960 units

Breakeven DVD units = 21960*50% = 10980

Breakeven Equipment set units = 21960 * 16.67% = 3660 units

Breakeven yoga mat units = 21960*33.33% = 7320 units

Solution 3a:

Contribution Margin Income Statement
Particulars	DVD	Equipment set	Yoga Mat	Total
Sales units	13500	4500	9000
Sales	$108,000.00	$112,500.00	$135,000.00	$355,500.00
Variable Cost	$54,000.00	$67,500.00	$81,000.00	$202,500.00
Contribution Margin	$54,000.00	$45,000.00	$54,000.00	$153,000.00
Fixed Cost				$124,440.00
Total Net Income				$28,560.00

Solution 3b:

Overall contribution margin ratio = $153,000 / $355,500 = 43%

Overall break even sales revenue = Fixed cost / Contribution margin ratio = $124,440 / 43.038% = $289,140

Solution 4:

Margin of safety in sales dollars = Actual sales - Breakeven Sales = $355,500 - $289,140 = $66,360