Question

Problem 5-28 (Algo) Sales Mix; Multiproduct Break-Even Analysis [LO5-9]

Topper 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	$	40.00	$	60.00	$	90.00
Variable expenses per racket:
Production	$	22.00	$	27.00	$	31.50
Selling (5% of selling price)	$	2.00	$	3.00	$	4.50

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

	Per Month
Fixed production costs	$	122,000
Advertising expense		102,000
Administrative salaries		52,000
Total	$	276,000

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

	Standard	Deluxe	Pro	Total
April	2,000	1,000	5,000	8,000
May	8,000	1,000	3,000	12,000

Required:

1-a. Prepare contribution format income statements for April.

1-b. Prepare contribution format income statements for May.

3. Compute the Racket Division’s break-even point in dollar sales for April.

4. Whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix?

5. Assume that sales of the Standard racket increase by $20,200. What would be the effect on net operating income? What would be the effect if Pro racket sales increased by $20,200? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Answer 1

Answer :

1 (a)  contribution format income statements for April.

	Standard	Deluxe	Pro	Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales	$ 80000	100	$ 60000	100	$ 450000	100	$ 590000	100
Variable expenses :
Production	$ 44000	55	$ 27000	45	$ 157500	35	$ 228500	38.7
Selling	$ 4000	5	$ 3000	5	$ 22500	5	$ 29500	5
Total variable Expenses	$ 48000	60	$ 30000	50	$ 180000	40	$ 258000	43.7
Contribution Margin	$ 32000	40	$ 30000	50	$ 270000	60	$ 332000	56.3
Fixed Expenses
Production							$ 122000
Advertising							$ 102000
Administrative							$ 52000
Total Fixed expenses							$ 276000
Net Operating Income							$ 56000

1 (b) contribution format income statements for May.

	Standard	Deluxe	Pro	Total
	Amount	%	Amount	%	Amount	%	Amount	%
Sales	$ 320000	100	$ 60000	100	$ 270000	100	$ 650000	100
Variable expenses :
Production	$ 176000	55	$ 27000	45	$ 94500	35	$ 297500	45.80
Selling	$ 16000	5	$ 3000	5	$ 13500	5	$ 32500	5
Total variable Expenses	$ 192000	60	$ 30000	50	$ 108000	40	$ 330000	50.80
Contribution Margin	$ 128000	40	$ 30000	50	$ 162000	60	$ 320000	49.20
Fixed Expenses
Production							$ 122000
Advertising							$ 102000
Administrative							$ 52000
Total Fixed expenses							$ 276000
Net Operating Income							$ 44000

3.Racket Division’s break-even point in dollar sales for April.

= Fixed cost / PV ratio

= $ 276000 / 56.30 %

= $ 490231 ( Approx )

4. break-even point would be higher with May’s sales mix than with April’s sales mix.

5.

if sales of the Standard racket increase by $20,200

Net operating income increase = $ 20200* 40 % = $ $ 8080

if Pro racket sales increased by $20,200

Net operating income increase = $ 20200*60 % = $ 12120