Question
In: Accounting
Problem 5-27 Sales Mix; Break-Even Analysis; Margin of Safety [LO5-7, LO5-9] Island Novelties, Inc., of Palau...
Problem 5-27 Sales Mix; Break-Even Analysis; Margin of Safety [LO5-7, LO5-9]
Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows:
| Hawaiian Fantasy | Tahitian Joy | |||||
| Selling price per unit | $ | 30 | $ | 125 | ||
| Variable expense per unit | $ | 21 | $ | 25 | ||
| Number of units sold annually | 10,000 | 5,600 | ||||
Fixed expenses total $565,500 per year.
Required:
1. Assuming the sales mix given above, do the following:
a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.
b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.
2. The company has developed a new product called Samoan Delight that sells for $50 each and that has variable expenses of $35 per unit. If the company can sell 20,000 units of Samoan Delight without incurring any additional fixed expenses:
a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.
b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.
Solutions
Expert Solution
| Req 1A | |||||||||
| 10000 | 5,600 | ||||||||
| Island Novelties Inc | |||||||||
| Contribution income statement | |||||||||
| Hawaiian Fantasy | Tahitian joy | Total | |||||||
| Amount | % | Amount | % | Amount | % | ||||
| Sales | 300000 | 100% | 700000 | 100% | 1000000 | 100% | |||
| Variable expenses | 210000 | 70% | 140000 | 20% | 350000 | 35% | |||
| Contribution margin | 90000 | 30% | 560000 | 80% | 650000 | 65% | |||
| Fixed expenses | 565,500 | ||||||||
| Net operating income | 84,500 | ||||||||
| Req 1B | |||||||||
| Break even point in dollar sales | 870000 | ||||||||
| margin of safety in dollars | 130000 | ||||||||
| margin of safety percentage | 13.0% | ||||||||
| Break even point in dollar sales = fixed expense/contribution margin ratio | |||||||||
| 565500/65% | |||||||||
| 870000 | |||||||||
| margin of safety = actual sales - break even sales | |||||||||
| 1,000,000-870,000 | |||||||||
| 130000 | |||||||||
| Margin of safety percentage = margin of safety/actual sales | |||||||||
| 130,000/1,000,000 | |||||||||
| 13.0% | |||||||||
| Required 2A | |||||||||
| Island Novelties Inc | |||||||||
| Contribution income statement | |||||||||
| Hawaiian Fantasy | Tahitian joy | Samoan | total | ||||||
| Amount | % | Amount | % | Amount | % | amount | % | ||
| Sales | 300000 | 100% | 700000 | 100.0% | 1000000 | 100% | 2000000 | 100.0% | |
| Variable expenses | 210000 | 70% | 140000 | 20.0% | 700000 | 70% | 1050000 | 52.5% | |
| Contribution margin | 90000 | 30% | 560000 | 80.0% | 300000 | 30% | 950000 | 47.5% | |
| Fixed expenses | 565,500 | ||||||||
| Net operating income | 384,500 | ||||||||
| Req 2b | |||||||||
| Break even point in dollar sales | 1190526 | ||||||||
| margin of safety in dollars | 809474 | ||||||||
| margin of safety percentage | 40.5% | ||||||||
| Break even point in dollar sales = fixed expense/contribution margin ratio | |||||||||
| 565500/47.5% | |||||||||
| 1190526 | |||||||||
| margin of safety = actual sales - break even sales | |||||||||
| 2,000,000 - 1,190,526 | |||||||||
| 809474 | |||||||||
| Margin of safety percentage = margin of safety/actual sales | |||||||||
| 809,474/2,000,000 | |||||||||
| 40.5% | |||||||||
ekkarill92 answered 11 months agoRelated Solutions
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Variable expenses
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$
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$
66,240
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