Penury Company offers two products. At present, the following represents the usu

Question

Penury Company offers two products. At present, the following represents the usual results of a month's operations:

Find the margin of safety in dollars.

The company is considering decreasing product K's unit sales to 80,000 and increasing product L's unit sales to 180,000, leaving unchanged the selling price per unit, variable expense per unit, and total fixed expenses. calculate the net operating income.

Would you advise adopting this plan?

Refer to (c) above. Under the new plan, find the break-even point in dollars. (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)

Under the new plan in (c) above, find the margin of safety in dollars. (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)

Product K Product L Per Unit Per Unit Combined Sales revenue $ 120,000 $ 1.20 $ 80,000 $ 0.80 $ 200,000 Variable expenses 60,000 0.60 60,000 0.60 120,000 Contribution margin $ 60,000 $ 0.60 $ 20,000 $ 0.20 $ 80,000 Fixed expenses 50,000 Net operating income $ 30,000

Explanation / Answer

a. Find the break-even point in terms of dollars.

Contribution Margin Ratio = 80000/200000 = .40 or 40%

Break-even point in terms of dollars

= Fixed Expenses/Contribution Margin Ratio

= 50000/.40

= $125,000

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b. How many dollars of product K are sold at breakeven?

Current Sale Produt K = 120000/1.20 = 100,000 Units

Current Sale Produt L = 80000/.80 = 100,000 Units

So current mix is 1:1

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Dollars of product K are sold at breakeven = {1.20/(1.20+.80)}*125000 = $75000

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Operating Result under the Proposed Sales plan

                                    Product K (80000 Units)        Product L (180000 Units)

                                          Amount Per Unit             Amount    Per Unit                 Combined Amount

Sales revenue................. $96,000   $1.20                  $144,000 $.80                                    $200,000

Variable expenses...........48,000      0.60                     108,000   0.60                                    120,000

Contribution margin.......$48,000   $0.60                    $36,000    $0.20                                   84,000

Fixed expenses .............                                                                                                         $50,000

Net operating income......                                                                                                       $34,000

Since the net income increased from $30000 to $34000 we should adopt the new plan.

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