Exercise 7-29 Retail; CVP Analysis with Multiple Products (LO 7-1, 7-2,7-5) Tim\

Question

Exercise 7-29 Retail; CVP Analysis with Multiple Products (LO 7-1, 7-2,7-5) Tim's Bicycle Shop sells 21-speed bicycles. For purposes of a cost-volume-profit analysis, the shop owner has divided sales Into twc categorles, as follows: Sales Invoice Price $500 Sales Product Type High-quality Medium-quality 300 Cost Commission $275 $25 15 135 Three-quarters of the shop's sales are medium-quality bikes. The shop's annual fixed expenses are $65,000. (In the following requirements, ignore income taxes.) Requirec 1. Compute the unit contribution margin for each product type 2. What is the shop's sales mix? 3. Compute the weighted-average unit contribution margin, assuming a constant sales mix. 4. What is the shop's break-even sales volume in dollars? Assume a constant sales mix. 5. How many bicycles of each type must be sold to earn a target net Income of $48,750? Assume a constant sales mix. Complete this question by entering your answers in the tabs below Required 1Required 2 Required 3 Required 4 Required 5 Compute the unit contribution margin for each product type. Bicycle Type High-quality Medium-quality in

Explanation / Answer

1. Unit contribution margin:

Unit Contribution margin

(A - B)

2. Shop's sales mix:

Given that, 3 quarters of the shop's sales are medium quality bikes i.e 75% (3 / 4) of sales mix is of medium quality bikes.

High quality bikes sales mix = (100-75) = 25%

3.Weighted average unit contribution:

Weighted average unit contribution = Unit contribution x sales mix

= $200 x 25% + $150 x 75%

= $162.5

4.Break even sales volume in dollars:

BEP ( in units) = Fixed cost / Weighted average unit contribution

= $65000 / $162.5

= 400 bicycles

Therefore BEP in dollars = $50000 + $90000 = $140000

5.No.of bicycles to be sold:

Shop's Target sales = (Fixed expenses + Target Income ) / Weighted average unit contribution

= ($65000 + $48750) / $162.5

=700 bicycles

Shop must sell following volume of bicycles to earn target income of $48750:

High quality = 700 x 25% = 175 bicycles

Medium quality = 700 x 75% = 525 bicycles

Bicycle type Sales price (A) Variable cost (B)

Unit Contribution margin

(A - B)

High-quality $500 $300 (275+25) $200 Medium-quality $300 $150 (135+15) $150

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