   Chapter 7, Problem 5MTC ### Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

#### Solutions

Chapter
Section ### Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
292 views

# Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Costs, Multiple-Product SettingIf both the variable and fixed production costs (refer to your answer to Requirement 1) associated with the canoe product line increased by 5% (beyond the estimate from the high-low analysis), how many canoes and paddles would need to be sold in order to earn a target income of $96,000? Assume the same sales mix and additional fixed costs as in Requirement 3. To determine Compute the units to be sold of canoe and paddle in order to earn a target income of$96,000 if variable and fixed cost associated with canoe increased by 5%.

Explanation

Break-Even Point:

The point or situation where the amount of total cost is equivalent to total revenue is known as the break-even point. It is the point where there is no loss or no profit.

The package of canoe and paddle is given below:

 Product Price ($) A Unit Variable Cost ($) B Unit Contribution Margin ($) C (A−B) Sales Mix D Package Unit Contribution Margin ($) (C×D) Canoe 500 3102 190 11 190 Paddle 50 40 10 41 40 Total 230

Table (1)

Use the following formula to calculate number of units to be sold to earn an operating income of $296,400: Numberofpackages=Targetincome+TotalfixedcostUnitcontributionmargin Substitute$96,000 for target income, $123,0003 for total fixed cost and$230 for unit contribution margin in the above formula.

Numberofpackages=$96,000+$123,000$230=$219,000$230=952.17or953packages Therefore, the company must sell 953 packages to earn an operating income of$96,000.

Use the following formula to calculate target units of canoe:

Targetunits=Targetpackages×Sales mix

Substitute 953 packages for break-even packages and 11 for sales mix in the above formula.

Targetunits=953×1=953units

Therefore, the target units of canoe are 953 units.

Use the following formula to compute target units of paddle:

Targetunits=Targetpackages×Sales mix

Substitute 953 units for break-even packages and 41 for sales mix in the above formula.

Targetunits=953×4=3,812units

Therefore, the target units of paddle are 3,812 units.

Note: Values of variable cost and fixed cost are computed in (1MTC).

Working Note:

1. Calculation of sales mix:

Ratio for canoe:

Ratio=NumberofcanoeTotalnumberofitems=3001,500=15

The sales mix ratio for canoe and paddle is 1:4

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