Question

2. On-the-Go, Inc., produces two models of traveling cases for laptop computers: the Programmer and the Executive. The bags have the following characteristics:

	Programmer			Executive
Selling price per bag	$	60		$	100
Variable cost per bag	$	20		$	50
Expected sales (bags) per year		8,000			12,000

The total fixed costs per year for the company are $678,000.

Required:

a. What is the anticipated level of profits for the expected sales volumes?

b. Assuming that the product mix is the same at the break-even point, compute the break-even point. (Round your final answer up to the nearest whole unit.)

c. If the product sales mix were to change to nine Programmer-style bags for each Executive-style bag, what would be the new break-even volume for On-the-Go? (Round your final answer up to the nearest whole unit.)

Answer 1

a. Calculation of anticipated level of profits for the expected sales volumes:

	Programmer	Executive	Total
Expected sales (bags) per year	8,000 Bags	12,000 Bags
a. Sales	$480,000 [8,000 bags x $60]	$1,200,000 [12,000 bags x $100]	$1,680,000
b. Variable Cost	$160,000 [8,000 bags x $20]	$600,000 [12,000 bags x $50]	$760,000
c. Contribution Margin (a - b)	$320,000	$$600,000	$920,000
d. Fixed Cost			$678,000
Net Profit (c - d)			$242,000

Therefore from the above table, anticipated net profit for the expected sales volume = $242.000

b. Computation of the Break-Even Point assuming the product mix is the same at the break-even point:

A Multi-Product company like On the Go Inc. can caluclate Break Even Point by using below formula:

Break Even Point = Total Fixed Cost ÷ Total Weighted Average Contribution Margin per unit

• In the Question it is give that Fixed Cost per Year = $678,000.
• From the above formula, we can say that Knowing the weighted-average contribution margin per Unit is necessary in order to calculate the break-even point of a business with multiple products or services.

Steps to calculate weighted-average contribution margin per Unit:

• Step 1 -  Calculate the contribution margin of one bag of each product (Programmer style bag & Executive style bag) by deducting the variable cost of one bag from its selling price.

	Programmer	Exectuive
a. Selling Price per Bag	$60	$100
b. Variable Cost per Bag	$20	$50
Contribution Margin per Bag (a -b)	$40	$50

• Step 2 - Calculate the percentage of total sales mix that each product accounts for. Divide the total sales value of each product by the total sales revenue of the company and multiply by 100 to find the percentage.

However in the question (Question b) It is said that the Product mix is same at the Break Even Point. That means Sales value of Programmer-style bags is equal to sales value of Exectuve style bags. at the Break even point. Means Sales mix percentage of Programmer Style bag is 50% and Sales mix Percentage of Executive style mix is 50%.

• Step 3 - Calculating Weighted Average Contribution per Margin of Each product.

	Programmer	Exectuive
Contribution Margin per Bag	$40	$50
Sales Mix Percentage	50%	50%
Weighted Average Contibution margin per unit	$20	$25

Total Weighted Average Contribution Margin per Unit = $20 + $25 = $45.

Now we have both Fixed Cost and Total Weighted Average Contribution Margin per Unit. All we have to do is to calculate using the formula.

Therefore,

Break Even Point = Total Fixed Cost ÷ Total Weighted Average Contribution Margin per unit

Break Even point = $678,000 ÷ $45 = 15,066.666 Bags = 15,067 bags (Approximately)

c.  Computation of the new Break-Even Point assuming the product mix were to change to nine Programmer-style bags for each Executive-style bag:

All we have do is what we have done above.

Break Even Point = Total Fixed Cost ÷ Total Weighted Average Contribution Margin per unit

Fixed Cost = $678,000

Calculating Total Weighted Average Contribution per Unit:

• Step 1 -  Calculate the contribution margin of one bag of each product (Programmer style bag & Executive style bag) by deducting the variable cost of one bag from its selling price.

	Programmer	Exectuive
a. Selling Price per Bag	$60	$100
b. Variable Cost per Bag	$20	$50
Contribution Margin per Bag (a -b)	$40	$50

• Step 2 - Calculate the percentage of total sales mix that each product accounts for. Divide the total sales value of each product by the total sales revenue of the company and multiply by 100 to find the percentage.

However in the question (Question c) It is said that the Product mix is were to change to nine Programmer-style bags for each Executive-style bag. Means In a product mix of 10 bags of Both the Programmer-style bags and Executive-style bag, there are 9 Programmer-style bags and 1 Executive-style bag.

	Programmer	Exectuive	Total
a. Product mix	9 Bags	1 Bag	10 Bags
b. Selling Price per Bag	$60	$100
c. Sales (a x b)	$540	$100	$640

Sales mix percentage of  Programmer style bag = $540 ÷ $640 = 84.4%

Sales mix percentage of Executive style bag = $100 ÷ $640 = 15.6%

• Step 3 - Calculating Weighted Average Contribution per Margin of Each product.

	Programmer	Exectuive
Contribution Margin per Bag	$40	$50
Sales Mix Percentage	84.4%	15.6%
Weighted Average Contibution margin per unit	$33.76	$7.8

Total Weighted Average Contribution Margin per Unit = $33.76 + $7.8= $41.56

Now we have both Fixed Cost and Total Weighted Average Contribution Margin per Unit. All we have to do is to calculate using the formula.

Therefore,

Break Even Point = Total Fixed Cost ÷ Total Weighted Average Contribution Margin per unit

Break Even point = $678,000 ÷ $41.56 = 16,314 bags