Question

Located near a national park on the Yarra River, Colbee Hotel was built in 1915 by the Top End Railway. In an effort to supplement its lodging revenue, the hotel decided in 2012 to begin manufacturing and selling small wooden canoes decorated with symbols hand-painted by local indigenous Australians. Due to the great success of the canoes, the hotel began manufacturing and selling paddles as well in 2015. Many hotel guests purchase a canoe and paddles for use in self-guided tours of the Yarra.

Because production of the two products began in different years, the canoes and paddles are produced in separate production facilities and employ different laborers. Each canoe sells for $500, and each paddle sells for $50. the variable cost for canoe is $300 and paddle is $40, while the fixed costs are $80,000 and 10,000 for canoe and paddle respectively. $30,000 of common fixed costs for a customer service hotline used for both canoe and paddle customers.
The hotel's accounting system data show an average sales mix of approximately 300 canoes and 1200 paddles each season.

a. Use Cost-Volume-Profit analysis to calculate the break-even point in units for :
-The canoe product line only (i.e., single-product setting)
-The paddle product line only (i.e., single-product setting)

b. Use Cost-Volume-Profit analysis to calculate the break-even point in units for both the canoe and paddle product lines combined (i.e., the multiple-product setting).

c. If both the variable and fixed costs associated with the canoe product line increased by 5%, how many canoes and paddles would need to be sold in order to earn a target income of $96,000?

d. Calculate the hotel's margin of safety (both in units and in sales dollars) for Colbee Hotel, assuming the same facts as in Requirement b, and assuming it sells 700 canoes and 2,500 paddles next year.

Answer 1