Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahiti

Question

Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue, cost, and sales data for the two products follow:

Hawaiian Tahitian Joy
Selling price per unit $ 20 $ 140
Variable expenses per unit $ 9 $ 35
Number of units sold annually 18,000 6,000

Fixed expenses total $710,700 per year.

Required: 1. Assuming the sales mix given above, do the following:

a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

b. compute the break even point in dollar sales for the compnay as a whole and the margin of safety in both dollars and percent.

Break-even point in dollars:
Margin of safety in dollars:
argin of safety in percentage: %

Explanation / Answer

CONTRIBUTION MARGIN INCOME STATEMENT HAWAIIAN TAHITIAN JOY TOTAL AMOUNT % AMOUNT % AMOUNT % Sales revenue Hawaiian (18000 unist @ 20) 360000 100% Tahotian (6000 units @ 140) 840000 100% 1200000 100.00% Less: variable cost: Hawaiian (18000 units @9) 162000 45% Tahotian (6000 units @35) 210000 25% 372000 31% CONTRIBUTION 198000 55% 630000 75% 828000 69.00% Less: Fixed cost 710700 59.23% Net Income 117300 9.77% Req b: Weighted Average CM ratio: 69% Break even point in$: fixed cost /CM ratio = 710,700 /69% =$1030,000 Break even asa % of sales: 1030,000 /1200,000 *100 = 85.83% Margin of safety: Net income /CM ratio = 117,300 /69% = $ 170,000 Margin of safety as % of sales: 170000/1200,000 *100= 14.17%

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