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 18,400 portable grills, 46,000 stationary grills, and 4,600 smokers. Information on the three models is as follows: Portable Stationary Smokers Price $92 $201 $252 Variable cost per unit 45 135 144 Total fixed cost is $2,064,960. 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 = 4:10:1

	Portable grills	Stationary grills	Smokers
Sales units	18400	46000	4600
Divide by 200	92	230	23
Divide by 23	4	10	1

2.

	Sales mix	Sales price per unit		Total per composite unit
Portable grills	4	$92		$368
Stationary grills	10	$201		$2,010
Smokers	1	$252		$252
				$2,630
	Sales mix	Variable cost per unit		Total per composite unit
Portable grills	4	$45		$180
Stationary grills	10	$135		$1,350
Smokers	1	$144		$144
				$1,674

Contribution margin per composite unit
Sales price		$2,630
Less: Variable cost		$1,674
Contribution margin		$ 956

Total fixed costs	/	Contribution margin per unit	=	Break-Even Units
$2,064,960	/	$956	=	2160	composite units

	Number per composite unit	Number of composite units to break even	Break-even quantity
Portable grills	4	2160	8640	units
Stationary grills	10	2160	21600	units
Smokers	1	2160	2160	units

3.

Texas-Q Company
Income Statement
Sales	12098000
Variable costs	7700400
Contribution margin	4397600
Fixed costs	2064960
Net income $	2332640

Overall contribution margin ratio = $4397600/$12098000 = 36.35%

Overall break-even sales revenue = $2064960/36.35% = $5680770

4. Margin of safety = Sales - Break-even sales = $12098000 - $5680770 = $6417230