Hitch Company sells Products S and T and has made the following estimates for th

Question

Hitch Company sells Products S and T and has made the following estimates for the coming year:

Product Unit Selling Price Unit Variable Cost Sales Mix
S $30 $24 60%
T 70 56 40

Fixed costs are estimated at $202,400. Determine (a) the estimated sales in units of the overall product necessary to reach the break-even point for the coming year, (b) the estimated number of units of each product necessary to be sold to reach the break-even point for the coming year, and (c) the estimated sales in units of the overall product necessary to realize an operating income of $119,600 for the coming year.
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Explanation / Answer

a) According to the given information, Weighted -average contribution margin is to be calculated to determine the break-even sales in units: Weighted-average CM = [0.60 * ($30 - $24)] + [0.4 * ($70 - $56)] = [ $3.6 +$5.6] = $9.2 The break-even point in units is calculated as: Break-even point in units = Fixed costs / Weighted-average CM = $202,400 / $9.2 = 22,000 units b) The break-even units to produce each product are: Product-S: 22,000 units * 0.60 = 13,200 units Product-T: 22,000 units * 0.40 = 8,800 units --------------- 22,000 units --------------- c) The formula for calculating the Estimated sales is Required sales in units = (Fixed costs + Target income) / Weighted-average CM per = ($202,400 + $119,600) / $9.2 = $322,000 / $9.2 = 35,000 units Therefore, 35,000 units to be produced to realize an operating income of $119,600.

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