Question

Question 3 30 marks Travel On Inc. sells luggage. They sell a duffle bag, a carry-on suitcase and a deluxe suitcase. The price and variable cost for each type of luggage is listed below. Price Variable Cost Duffle bag R100 R 25 Carry-on 180 40 Deluxe 300 120 The total fixed costs for Travel On Inc. equals R60,000. For every 8 duffle bags. Travel On Inc sells it sells 3 carry-on suitcases and 1 deluxe suitcase. PBA4807 - Accounting for managers Page 15 of 16 © UNISA Graduate School of Business Leadership Required: 1.) Calculate the package contribution margin. 2.) Calculate the break-even point in units for duffle bags, carry-on suitcases and deluxe suitcases. 3.) If Travel On Inc. has a target income for the coming year of R300,000, how many packages will the company have to sell? 4.) Based on your answer in Part C, prepare a contribution margin income statement for the coming year. 5.) What is the company’s margin of safety in packages?

Answer 1

Contribution Margin : The difference between the selling price and variable cost is considered as the contribution margin of the product.

Break-even Point : It is the point where neither profit is earned nor any loss incurred. In other words, the unit in sales or sales in amount where the total expense is equal to selling price of the product.

1. Computation of contribution margin

Contribution margin per unit = Selling price per unit - Variable cost per unit

	Price	Variable cost	Contribution Margin per unit	Sales Mix	Package Contribution Margin
Duffle bag	$100	$25	$75	8	$600
Carry-on	$180	$40	$140	3	$420
Deluxe	$300	$120	$180	1	$180
					$1,200

2. Computation of break-even point in units

	Duffle bag	Carry-on	Deluxe
Break-Even Point	800 units	150 units	50 units

Calculations:

Break-Even Point = Fixed Cost / Package Contribution Margin

= $60,000 / 1,200

= 50 packages

* 50 Package X Sales Mix

			Sales Mix	Break Even Point
Duffle bag	50 packages	X	8	800 Duffle bag
Carry-on	50 packages	X	3	150 Carry-on
Deluxe	50 packages	X	1	50 Deluxe

3. How many will the company have to sell to earn a desired profit of $300,000.

Desired sales in unit = Fixed cost + Desired Profit / Package Contribution Margin

= $60,000 + $300,000 / 1,200

= 300 packages

			Sales Mix	Desired Sales in units
Duffle bag	300 packages	X	8	2,400 Duffle bag
Carry-on	300 packages	X	3	900 Carry-on
Deluxe	300 packages	X	1	300 Deluxe

4. Contribution Margin Income Statement

Contribution Margin Income Statement

Particulars	Amount
Sales Revenue	$492,000*
Less: Variable Expenses	$132,000**
Contribution Margin	$360,000
Less: Fixed Expenses	$60,000
Net Income	$300,000

Notes:

Sales Revenue*

	Selling Prince	Units	Sales Revenue
Duffle bag	100	2,400	$240,000
Carry-on	180	900	$162,000
Deluxe	300	300	$90,000
Total			$492,000*

Variable Expenses**

	Variable cost	Units	Sales Revenue
Duffle bag	$25	2,400	$60,000
Carry-on	$40	900	$36,000
Deluxe	$120	300	$36,000
Total			$132,000**

5. Margin of Safety

Margin of Safety is the difference between the budgeted sales unit or desired sales unit and the break-even sales in unit. It is considered as the safety net where the business safe from the any loss.

Margin of Safety = Budgeted Sales in unit - Break-Even Sales in unit

= 300 packages - 50 packages

= 250 packages