Concept explainers
More-Power Company has projected sales of 75,000 regular sanders and 30,000 mini-sanders for next year. The
Required:
- 1. Set up the given income statement on a spreadsheet (e.g., ExcelTM). Then, substitute the following sales mixes, and calculate operating income. Be sure to print the results for each sales mix (a through d).
- 2. Calculate the break-even units for each product for each of the preceding sales mixes.
1.
Show the income statement on the spreadsheet, for the given sales mixes and compute the operating income.
Explanation of Solution
Sales mix: Sales mix refers to relative distribution of the total sales amongst the total number of units sold by a company. It is also expressed as a percentage of units sold for each product produced with respect to the total units sold for all the products produced.
Compute the operating income for the given sales mixes:
Particulars | RegularSander | Mini-Sander | Amount ($) |
Sales Mix of 2:1 | |||
Sales | $3,000,000 | $2,250,000 | $5,250,000 |
Less: Variable expenses | $1,800,000 | $1,125,000 | $2,925,000 |
Contribution margin | $1,200,000 | $1,125,000 | $2,325,000 |
Less: Direct Fixed Expenses | $250,000 | $450,000 | $700,000 |
Product Margin | $950,000 | $675,000 | $1,625,000 |
Less: Common fixed expenses | $600,000 | ||
Operating income | $1,025,000 | ||
Sales Mix of 1:1 | |||
Sales | $2,400,000 | $3,600,000 | $6,000,000 |
Less: Variable expenses | $1,440,000 | $1,800,000 | $3,240,000 |
Contribution margin | $960,000 | $1,800,000 | $2,760,000 |
Less: Direct Fixed Expenses | $250,000 | $450,000 | $700,000 |
Product Margin | $710,000 | $1,350,000 | $2,060,000 |
Less: Common fixed expenses | $600,000 | ||
Operating income | $1,460,000 | ||
Sales Mix of 1:3 | |||
Sales | $1,200,000 | $5,400,000 | $6,600,000 |
Less: Variable expenses | $720,000 | $2,700,000 | $3,420,000 |
Contribution margin | $480,000 | $2,700,000 | $3,180,000 |
Less: Direct Fixed Expenses | $250,000 | $450,000 | $700,000 |
Product Margin | $230,000 | $2,250,000 | $2,480,000 |
Less: Common fixed expenses | $600,000 | ||
Operating income | $1,880,000 | ||
Sales Mix of 1:2 | |||
Sales | $1,200,000 | $3,600,000 | $4,800,000 |
Less: Variable expenses | $720,000 | $1,800,000 | $2,520,000 |
Contribution margin | $480,000 | $1,800,000 | $2,280,000 |
Less: Direct Fixed Expenses | $250,000 | $450,000 | $700,000 |
Product Margin | $230,000 | $1,350,000 | $1,580,000 |
Less: Common fixed expenses | $600,000 | ||
Operating income | $980,000 |
Table (1)
Working notes:
Compute the sales mix ratio for given sales mixes.
Particulars | RegularSander | Mini-Sander | Sales Mix Ratio |
Number of actual units | 75000 | 30000 | 5:2 |
Sales mix a | 75000 | 37500 | 2:1 |
Sales mix b | 60000 | 60000 | 1:1 |
Sales mix c | 30000 | 90000 | 1:3 |
Sales mix d | 30000 | 60000 | 1:2 |
Table (2)
Compute the sales amount and variable expenses for the given sales.
Particulars | Cost per unit ($) | Number of units | Amount ($) |
Sales Mix of 2:1 | |||
Sales of Regular Sander | $40 | 75000 | $3,000,000 |
Sales of Mini Sander | $60 | 37500 | $2,250,000 |
Variable Cost of Regular Sander | $24 | 75000 | $1,800,000 |
Variable Cost of Mini Sander | $30 | 37500 | $1,125,000 |
Sales Mix of 1:1 | |||
Sales of Regular Sander | $40 | 60000 | $2,400,000 |
Sales of Mini Sander | $60 | 60000 | $3,600,000 |
Variable Cost of Regular Sander | $24 | 60000 | $1,440,000 |
Variable Cost of Mini Sander | $30 | 60000 | $1,800,000 |
Sales Mix of 1:3 | |||
Sales of Regular Sander | $40 | 30000 | $1,200,000 |
Sales of Mini Sander | $60 | 90000 | $5,400,000 |
Variable Cost of Regular Sander | $24 | 30000 | $720,000 |
Variable Cost of Mini Sander | $30 | 90000 | $2,700,000 |
Sales Mix of 1:2 | |||
Sales of Regular Sander | $40 | 30000 | $1,200,000 |
Sales of Mini Sander | $60 | 60000 | $3,600,000 |
Variable Cost of Regular Sander | $24 | 30000 | $720,000 |
Variable Cost of Mini Sander | $30 | 60000 | $1,800,000 |
Table (3)
2.
Compute for each sales mix the break-even point.
Explanation of Solution
Sales mix a:
Compute the package contribution margin units:
Input | Price (A) | Unit Variable cost (B) | Unit Contribution margin | Sales Mix (D) |
Package Unit Contribution margin |
Regular Sander | $40 | $24 | $16 | 2 | $32 |
Mini Sander | $60 | $30 | $30 | 1 | $30 |
Package Total | $62 |
Table (4)
Compute the break-even packages:
The number of break-even packages is 20,967.74.
Compute the break-even for Regular Sander:
The number of break-even for Regular Sander is 41,935.
Compute the break-even for Mini Sander:
The number of break-even for Mini Sander is 20,968.
Sales mix b:
Compute the package contribution margin units:
Input | Price (A) | Unit Variable cost (B) | Unit Contribution margin | Sales Mix (D) |
Package Unit Contribution margin |
Regular Sander | $40 | $24 | $16 | 1 | $16 |
Mini Sander | $60 | $30 | $30 | 1 | $30 |
Package Total | $46 |
Table (5)
Compute the break-even packages:
The number of break-even packages is 28,260.87.
Compute the break-even for Regular Sander:
The number of break-even for Regular Sander is 28,261.
Compute the break-even for Mini Sander:
The number of break-even for Mini Sander is 28,261.
Sales mix c:
Compute the package contribution margin units:
Input | Price (A) | Unit Variable cost (B) | Unit Contribution margin | Sales Mix (D) |
Package Unit Contribution margin |
Regular Sander | $40 | $24 | $16 | 1 | $16 |
Mini Sander | $60 | $30 | $30 | 3 | $90 |
Package Total | $106 |
Table (6)
Compute the break-even packages:
The number of break-even packages is 12,264.15.
Compute the break-even for Regular Sander:
The number of break-even for Regular Sander is 12,264.
Compute the break-even for Mini Sander:
The number of break-even for Mini Sander is 36,792.
Sales mix d:
Compute the package contribution margin units:
Input | Price (A) | Unit Variable cost (B) | Unit Contribution margin | Sales Mix (D) |
Package Unit Contribution margin |
Regular Sander | $40 | $24 | $16 | 1 | $16 |
Mini Sander | $60 | $30 | $30 | 2 | $60 |
Package Total | $76 |
Table (7)
Compute the break-even packages:
The number of break-even packages is 17,105.26.
Compute the break-even for Regular Sander:
The number of break-even for Regular Sander is 17,105.
Compute the break-even for Mini Sander:
The number of break-even for Mini Sander is 34,211.
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Chapter 16 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Faldo Company produces a single product. The projected income statement for the coming year, based on sales of 200,000 units, is as follows: Required: 1. Compute the unit contribution margin and the units that must be sold to break even. Suppose that 30,000 units are sold above the break-even point. What is the profit? 2. Compute the contribution margin ratio and the break-even point in dollars. Suppose that revenues are 200,000 greater than expected. What would the total profit be? 3. Compute the margin of safety in sales revenue. 4. Compute the operating leverage. Compute the new profit level if sales are 20 percent higher than expected. 5. How many units must be sold to earn a profit equal to 10 percent of sales? 6. Assume the income tax rate is 40 percent. How many units must be sold to earn an after-tax profit of 180,000?arrow_forwardKlamath Company produces a single product. The projected income statement for the coming year is as follows: Required: 1. Compute the unit contribution margin and the units that must be sold to break even. 2. Suppose 10,000 units are sold above break-even. What is the operating income? 3. Compute the contribution margin ratio. Use the contribution margin ratio to compute the break-even point in sales revenue. (Note: Round the contribution margin ratio to four decimal places, and round the sales revenue to the nearest dollar.) Suppose that revenues are 200,000 more than expected for the coming year. What would the total operating income be?arrow_forwardKeleher Industries manufactures pet doors and sells them directly to the consumer via their web site. The marketing manager believes that if the company invests in new software, they will increase their sales by 10%. The new software will increase fixed costs by $400 per month. Prepare a forecasted contribution margin income statement for Keleher Industries reflecting the new software cost and associated increase in sales. The previous annual statement is as follows:arrow_forward
- Aldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The divisions projected income statement for the coming year is: Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. (Note: Round answer to the nearest unit.) Calculate the contribution margin ratio and use it to calculate the break-even sales revenue. (Note: Round contribution margin ratio to four decimal places, and round the break-even sales revenue to the nearest dollar.) 2. The divisional manager has decided to increase the advertising budget by 250,000. This will increase sales revenues by 1 million. By how much will operating income increase or decrease as a result of this action? 3. Suppose sales revenues exceed the estimated amount on the income statement by 1,500,000. Without preparing a new income statement, by how much are profits underestimated? 4. Compute the margin of safety based on the original income statement. 5. Compute the degree of operating leverage based on the original income statement. If sales revenues are 8% greater than expected, what is the percentage increase in operating income? (Note: Round operating leverage to two decimal places.)arrow_forwardSchylar Pharmaceuticals, Inc., plans to sell 130,000 units of antibiotic at an average price of 22 each in the coming year. Total variable costs equal 1,086,800. Total fixed costs equal 8,000,000. (Round all ratios to four significant digits, and round all dollar amounts to the nearest dollar.) Required: 1. What is the contribution margin per unit? What is the contribution margin ratio? 2. Calculate the sales revenue needed to break even. 3. Calculate the sales revenue needed to achieve a target profit of 245,000. 4. What if the average price per unit increased to 23.50? Recalculate: a. Contribution margin per unit b. Contribution margin ratio (rounded to four decimal places) c. Sales revenue needed to break even d. Sales revenue needed to achieve a target profit of 245,000arrow_forwardCadre, Inc., sells a single product with a selling price of $120 and variable costs per unit of $90. The companys monthly fixed expenses are $180,000. What is the companys break-even point in units? What is the companys break-even point in dollars? Prepare a contribution margin income statement for the month of October when they will sell 10,000 units. How many units will Cadre need to sell in order to realize a target profit of $300,000? What dollar sales will Cadre need to generate in order to realize a target profit of $300,000? Construct a contribution margin income statement for the month of August that reflects $2,400,000 in sales revenue for Cadre, Inc.arrow_forward
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- Kerr Manufacturing sells a single product with a selling price of $600 with variable costs per unit of $360. The companys monthly fixed expenses are $72,000. What is the companys break-even point in units? What is the companys break-even point in dollars? Prepare a contribution margin income statement for the month of January when they will sell 500 units. How many units will Kerr need to sell in order to realize a target profit of $120,000? What dollar sales will Kerr need to generate in order to realize a target profit of $120,000? Construct a contribution margin income statement for the month of June that reflects $600,000 in sales revenue for Kerr Manufacturing.arrow_forwardA company has prepared the following statistics regarding its production and sales at different capacity levels. Total costs: 1. At what point is break-even reached in sales dollars? In units? (Hint: Use the capacity level to determine the number of units.) 2. If the company is operating at 60% capacity, should it accept an offer from a customer to buy 10,000 units at 3 per unit?arrow_forwardUsing the information in the previous exercises about Marleys Manufacturing, determine the operating income for department B, assuming department A sold department B 1,000 units during the month and department A reduces the selling price to the market price.arrow_forward
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