Question

Textra Sports, Inc., produces high-quality sports equipment. The company's Racket Division manufactures three tennis rackets—the Standard, the Deluxe, and the Pro—that are widely used in amateur play. Selected information on the rackets is given below:

	Standard		Deluxe		Pro
Selling price per racket	$	58.00	$	76.00	$	97.00
Variable expenses per racket:
Production	$	23.20	$	26.60	$	29.10
Selling (5% of selling price)	$	2.90	$	3.80	$	4.85

All sales are made through the company's own retail outlets. The Racket Division has the following fixed costs:

	Per Month
Fixed production costs	$	113,000
Advertising expense		112,000
Administrative salaries		56,500
Total	$	281,500

Sales, in units, over the past two months have been as follows:

	Standard	Deluxe	Pro	Total
April	5,000	4,000	7,000	16,000
May	7,300	4,300	5,500	17,100

Required:
1-a.	Prepare contribution format income statements for April. (Round the "Total percent" answers to 1 decimal place.)

        

1-b.	Prepare contribution format income statements for May. (Round the "Total percent" answers to 1 decimal place.)

        
  

3.	Compute the Racket Division's break-even point in dollar sales for April. (Round your intermediate calculations to 3 decimal places and final answer to the nearest whole dollar.)

4.	Would the break-even point be higher or lower with May's sales mix than with April's sales mix?
	Higher Lower

5.	Assume that sales of the Standard racket increase by $33,000. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $33,000? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Answer 1

1	Income Statement for April
	Unit Sold	5000	4000	7000
		Standard	Deluxe	Pro	Total
	Sales Revenue	290000	304000	679000	1273000
	Variable Exp:
	-Production	116000	106400	203700	426100
	-Selling 5% of Sale	14500	15200	33950	63650
	Contribution Margin	159500	182400	441350	783250
	Fixed Cost:
	-Production				113000
	-Advertising Exp				112000
	-Administration Salaries				56500
	Net Operating Income				501750

2	Income Statement for May
	Unit Sold	7300	4300	5500	17100
		Standard	Deluxe	Pro	Total
	Sales Revenue	423400	326800	533500	1283700
	Variable Exp:
	-Production	169360	114380	160050	443790
	-Selling 5% of Sale	21170	16340	26675	64185
	Contribution Margin	232870	196080	346775	775725
	Fixed Cost:
	-Production				113000
	-Advertising Exp				112000
	-Administration Salaries				56500
	Net Operating Income				494225

3.

Racket Division's break-even point in dollar sales for April.	Fixed Cost for April/CM Ratio of April
	281500/0.615
	=457724
Fixed Cost	281500
CM Ratio 783250/1273000	0.615

4.

Since May CM Ratio is lower, hence May Break Even point will be higher in terms of Dollars as Same Fixed cost when dived by lower CM Ratio, BEP will be higher

5.

	Standard	Pro
CM Ratio	159500/290000*100	441350/679000*100
	55%	65%
Increase in Sale	33000	33000
Increase in Net Operating Income (sale*CM Ratio)	18150	21450